In support of the Thirteenth Quadrennial Review of Military Compensation, the authors of this report provide input on setting the level of military pay and the annual adjustment to military pay. They conclude that the U.S. Department of Defense should raise the benchmark it uses to set military pay and change the way it calculates the annual increase in military basic pay.

Cover: Setting the Level and Annual Adjustment of Military Pay
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Setting the Level and Annual Adjustment of Military Pay

by Beth J. Asch, Michael G. Mattock, Troy D. Smith, Jason M. Ward

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Research Questions

  1. How have recruiting and retention outcomes changed, and what changes have occurred in factors affecting recruiting and retention that would argue for a different benchmark than the 70th percentile?
  2. How has military pay compared with civilian pay since the 1990s, when the 70th percentile was set?
  3. How has military pay growth compared with civilian pay growth using the DECI, and does the DECI perform better than the ECI in terms of tracking recruiting and retention outcomes?
  4. What are the policy implications of the analyses? Has the RMC percentile needed to be higher than the 70th percentile to meet recruiting and retention objectives? Does the 70th percentile benchmark need to be increased? What are the advantages and disadvantages of the DECI versus the ECI, and are the early criticisms of the DECI still relevant?

Every four years, the U.S. Department of Defense (DoD) commissions a review of the military compensation system. Since the 9th such commission reporting in 2002, the benchmark for setting the level of military pay has been at about the 70th percentile of earnings for similar civilians given the unusual demands and arduous nature of military service. The 70th percentile benchmark was based on analysis from the 1990s indicating that pay at around this level had historically been necessary to enable the military to recruit and retain the quality and quantity of personnel required. In addition, by law, the annual increase in military basic pay is guided by changes in the Employment Cost Index (ECI), a measure of the growth in private-sector employment costs; research from the early 1990s suggested that an alternative to the ECI, the Defense Employment Cost Index (DECI), would be more relevant to military personnel.

The authors of this report provide input on the setting of the level of military pay, the relevance of the 70th percentile, and the use of the DECI versus the ECI in setting the annual adjustment to military pay. They find that current military pay may be too high, since recruit quality today exceeds DoD's stated requirements, and, further, quality and retention both exceed the levels observed during the late 1980s and mid-1990s, when the 70th percentile was established. However, the 70th percentile may be too low a benchmark, because there are reasons to believe that the recruiting environment is more difficult than it was in earlier periods. Figures of around the 75th to 80th percentile for enlisted personnel and of around the 75th percentile for officers are likely to meet existing recruit quality objectives.

Assessing the ECI versus the DECI, the authors conclude DoD should consider replacing or supplanting the former with the latter. The DECI has several advantages over the ECI, and most of the critiques of the DECI have been addressed by advances in data availability and computing power in recent decades.

Key Findings

Military pay may be too high, but the 70th percentile benchmark may be too low

  • The 70th percentile of civilian earnings is currently being used as a benchmark for setting military pay, based on analysis from the late 1980s and mid-1990s.
  • Military pay today exceeds the 70th percentile benchmark, reflecting the relatively fast military pay growth from the late 1990s to 2010, as well as a downward trend in real civilian wages.
  • Relative to the earlier periods, recruit quality across DoD is about the same in recent years, and retention is higher.
  • These findings suggest that military pay may be too high.
  • However, it does not necessarily follow that military pay should be slowed in the future to the point that the 70th percentile benchmark is achieved, because there are reasons to believe that the recruiting environment is more difficult than it was in earlier periods.

The DECI is a promising alternative, or supplement, to the ECI

  • The DECI has several advantages: the use of underlying data that reflect labor market outcomes from an employee, rather than an employer, perspective; weighting that reflects the age, educational attainment, and gender composition of military personnel; and the flexibility to assess paths of earnings growth for specific subgroups of interest within the overall active duty force.
  • Most of the critiques of the DECI have been addressed by advances in data availability and computing power in recent decades.

Recommendations

  • DoD should consider increasing the percentile of civilian earnings, currently 70th, that is used as a benchmark for setting military pay. A figure of around the 75th to 80th percentile for enlisted personnel is likely to meet existing recruit quality objectives. Similarly, a figure of around the 75th percentile for officers is likely to be appropriate.
  • DoD should compute the DECI each year, either as a supplement to the ECI or as a replacement, to impart information about civilian wage growth that is relevant to military personnel.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Changes over Time in Recruiting and Retention Outcomes and the Factors Affecting Them

  • Chapter Three

    Comparisons of the Level of Military and Civilian Pay

  • Chapter Four

    An Alternative Index for Setting the Annual Pay Adjustment

  • Chapter Five

    Conclusions and Policy Implications

  • Appendix A

    Trends over Time, by Service

  • Appendix B

    Average Regular Military Compensation, by Rank and Years of Service

  • Appendix C

    Process for Estimating Weighted Average Regular Military Compensation

  • Appendix D

    Additional Defense Employment Cost Index Tabulations

  • Appendix E

    Process for Estimating the Defense Employment Cost Index

  • Appendix F

    Data Points for Figures in Chapter Four and Appendix D

Research conducted by

The research was sponsored by the 13th Quadrennial Review of Military Compensation (QRMC) and conducted within the Forces and Resources Policy Center of the RAND National Security Research Division (NSRD).

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