Background

DOD is one of the nation’s largest employers, with more than 1.4 million  active-duty personnel (as of March 2011). To fulfill its mission of  maintaining national security, DOD must meet its human capital needs by  recruiting, retaining, and motivating a large number of qualified  individuals, though the requirement for new recruits has declined in the  last couple of years (see table 1 for the numbers of accessions and  reenlistments from fiscal years 2006 through 2010). The Office of the  Secretary of Defense for Personnel and Readiness is principally  responsible for establishing active-duty compensation policy.
In 1962, the Gorham Commission adopted the term “regular military  compensation” to be used to compare military and civilian-sector pay.  Regular military compensation is defined as the sum of basic pay,  allowances for housing and subsistence, and federal tax advantage. In  addition to regular military compensation, DOD also uses over 60  authorized special and incentive pays, including various enlistment and  selective reenlistment bonuses, to offer incentives to undertake or  continue service in a particular specialty or type of duty assignment.  According to DOD, special pays are used to selectively address specific  force management needs, such as staffing shortfalls in particular  occupational areas, hazardous or otherwise less desirable duty  assignments, and attainment and retention of valuable skills. In addition,  in certain occupational categories, such as technical and professional  fields, special pays are used to help ensure pay comparability with civilian  sector salaries. OSD believes that these pays offer flexibility to the  compensation system not otherwise available through the basic pay table.
To provide guidance to the services on managing their enlistment and  reenlistment bonus programs, the Office of the Secretary of Defense  (OSD) issued DOD Directive 1304.21. Under this directive, the Principal  Deputy Under Secretary of Defense for Personnel and Readiness is  assigned responsibilities including monitoring certain bonus programs  carried out by the services. Specifically, the Principal Deputy Under  Secretary of Defense for Personnel and Readiness is responsible for  establishing (1) criteria for designating military specialties that qualify for  these bonuses, (2) criteria for individual members’ eligibility for these  bonuses, and (3) reporting and data requirements for the periodic review  and evaluation of these bonus programs. The Principal Deputy Under  Secretary of Defense for Personnel and Readiness is also responsible for  recommending to the Secretary of Defense measures required to attain the  most efficient use of resources devoted to these programs.
As required by 37 U.S.C. § 1008, at least once every 4 years, the President  directs a review of the principles and concepts of the military  compensation system. These regular studies are called the Quadrennial  Reviews of Military Compensation and typically focus on issues such as  achieving flexibility and promoting fairness in compensation. The most  recent Quadrennial Review was completed in 2008 and offered a number  of recommendations, including simplifying the structure of special and  incentive pays.
We have completed a body of work on military compensation and  enlistment and reenlistment bonuses. For example, in April 2010, we  reported on the comparison of military to civilian pay. In a 2009 report,  we evaluated the Army’s use of bonuses and determined that the Army did  not know whether it was paying more than it needed to pay to get a cost- effective return on investment. In that report, we recommended that the  Army build on available analyses to set cost-effective enlistment and  reenlistment bonuses in order to avoid making excessive payments. As a  result of our report, the Army significantly reduced its enlistment and  reenlistment bonus program; however, the reductions were not based on  specific analysis that determined the cost-effective bonus amount.

	DOD’s Contracted Bonus Amounts Were 58 Percent Less in 2010 than in 2008, Its Peak Year

DOD contracted $1.2 billion in fiscal year 2010 for enlistment and  reenlistment bonuses, an amount that was 58 percent less than the $2.8  billion contracted in fiscal year 2008, its peak year. For the services, total  contracted bonus amounts peaked in fiscal years 2008 or 2009 and then  decreased. (See fig. 1.) Specifically, for fiscal years 2006 through 2009,  total contracted amounts for bonuses rose for the Air Force and the  Marine Corps and declined thereafter by 16 percent and 64 percent,  respectively. For the Army and the Navy, contracted amounts increased  through fiscal year 2008 and then declined by 78 percent and 40 percent,  respectively. Though the Air Force contracted the least of all the services  for bonuses from fiscal years 2006 to 2009, the total contracted amount  increased by 254 percent during that period, from $100 million to $352  million. The Air Force attributes this increase, in part, to the reenlistment  bonus program being underfunded in fiscal year 2006. In addition, the Air  Force believes that the increase was necessary to ensure that its hard-to- fill occupational specialties, such as battlefield airmen, were filled and to  accommodate the high operations tempo necessary for the war in Iraq and  Afghanistan. During the same time, the Marine Corps increased the  amounts contracted by 398 percent, from $108 million to $540 million. The  Marine Corps attributes this increase to the 2007 presidential Grow-the- Force initiative, which required the Marine Corps to increase its number of  active-duty personnel by 27,000. The Army also increased as part of the  Grow-the-Force initiative; its total contracted amounts increased by 15  percent from fiscal years 2006 to 2008. When growing the force, the Army  stated that it was not targeting bonuses to hard-to-fill or critical specialties  but rather was focused on meeting its overall recruiting mission. As a  result, once the Army met 99 percent of its growth in fiscal year 2008, it  began to pay fewer bonuses and target them to personnel with specific  critical skill sets, such as divers and satellite communication systems  operators/maintainers. Between fiscal years 2006 to 2008, the Navy  increased its total bonus funds by 13 percent. Navy officials attribute this  increase, in part, to the low unemployment rates for years 2007 and 2008  and the need to provide incentives to retain sailors with more options for  postmilitary employment.
From fiscal years 2006 through 2010, DOD contracted $11 billion for  enlistment and reenlistment bonuses (in constant fiscal year 2010 dollars).  Of this total, the Army accounted for approximately half, and the Air Force  for the least amount, at 9 percent (see fig. 2). During this time, DOD  reported that the active components of all four services met or exceeded  their numeric goals for enlisted accessions and, with the exception of the  Army in fiscal years 2006 through 2008, the active components of the  services also met their benchmarks for recruit quality. For retention, the  services generally met their goals but not in all years.
With the exception of the Army, the services contracted more on their  reenlistment bonus programs than on their enlistment bonus programs. Of  the $11 billion in contracted bonuses by all the services, $4.5 billion, or 40  percent, was for enlistment bonuses, and $6.6 billion, or 60 percent, was  for reenlistment bonuses. Army officials said they were paying high  enlistment bonuses to achieve very high accession rates beginning in 2005  because of the negative publicity surrounding the wars in Iraq and  Afghanistan, coupled with a strong economy and high employment rates  from 2005 to 2008. In addition, the Army was to increase its end strength,  consistent with the “Grow-the-Force” plan, from approximately 480,000 to  approximately 547,000. To meet this goal, the Army also had to retain  greater numbers of personnel.
Unlike the Army, the Navy, Air Force, and Marine Corps contracted a  greater portion of their overall bonus amounts on reenlistment, rather than  enlistment, bonuses (see fig. 3). According to the Navy, more is spent on  reenlistment bonuses because the cost to replace trained sailors is  significant due to long training programs, high attrition rates, and a high  demand for the occupations they are trained for in the civilian sector such  as those trained in nuclear occupations. Similarly, the Air Force attributed  its greater spending on reenlistment bonuses to the competition with the  private sector for trained and experienced airmen. The Air Force also  stated that the eligible population for reenlistment bonuses is much larger  than for enlistment bonuses and the Air Force has a training investment in  these experienced servicemembers. According to the Marine Corps, its  focus has also been on retaining proven combat leaders, and it has  therefore been targeting the majority of its discretionary funding on  retention rather than accessions. In addition, the Marine Corps stated that  the Marine Corps “sells itself” to potential applicants and therefore needs  to offer enlistment bonuses only for certain hard-to-fill occupations.
The services also varied in the average amounts of bonuses. From fiscal  years 2006 through 2008, the Army’s average per-person enlistment  bonuses were higher than those of the other services (see fig. 4). For  example, in fiscal year 2008, the Army’s average enlistment bonus was  $18,085, while the Air Force’s was only $4,271. However, in fiscal years  2009 and 2010, the Navy’s average per-person enlistment bonus amounts  were higher than those of all the other services. For example, in fiscal year  2010, the Navy’s average enlistment bonus was $23,957, while the Army’s  was $5,969. Navy officials stated that, during this period, it began to give  bonuses to fewer personnel, but those personnel were given higher  bonuses, thus driving the average up.
With respect to reenlistment bonuses, the Air Force’s average per-person  bonus amount was higher than those of the other services from fiscal  years 2006 through 2008. The Army’s average per-person bonus amount  was smaller than those of the other services from fiscal years 2006 through  2010, ranging from $13,796 to $4,392 (see fig. 5). In contrast, for fiscal  years 2006 through 2008, the Air Force’s average per-person reenlistment  bonus amounts were higher than the other services’, ranging from $32,667  to $36,247. The Marine Corps’ average was highest of all the services’ in  fiscal year 2009, at $36,753; and the Navy’s average was highest in fiscal  year 2010, at $32,719. According to Navy officials, the Navy needs to retain  highly skilled sailors who have undergone extensive training for skills that  are marketable in private industry and require arduous missions. For  example, officials commented that the SEALs are the first in line when  infiltrating military targets in dangerous environments, and their skills  have been sought by private contractors; as a result, their bonuses tend to  be higher. Navy officials also said that the length and cost of training  nuclear personnel makes the opportunity cost for retraining a new sailor  greater than the bonus.

	The Services Have Processes for Identifying Occupations That Are Hard to Fill but Not for Identifying the Most Cost-Effective Bonus Amounts

The services have processes in place that include the analysis of data on  how difficult it is to retain and recruit particular occupations and the  subjective judgment of personnel who are involved in managing these  occupations. DOD guidance allows the military departments the flexibility  to offer a bonus to any occupation that meets certain criteria, such as  being hard to fill or retain, and they may adjust bonuses as market  conditions change. However, although much research has been conducted  on bonuses’ effects on enlistment and retention, DOD does not know  whether the services have been paying more than necessary to meet their  recruiting and retention goals. Identifying optimal bonus amounts is  challenging because such studies must control for the numerous, changing  factors that affect individuals’ recruiting and retention decisions, such as  the unemployment rate, the deployment rate resulting from overseas  operations, and the changing public perceptions of the war.

		The Services Have Processes for Determining Bonus-Eligible Occupations

The services’ processes for determining which occupations should be  offered enlistment or reenlistment bonuses include the use of models.  While the services use different models, they generally incorporate factors  such as data on occupations that have historically received bonuses,  attrition and retention rates for these occupations, and the current  population for each occupation. Models for determining eligibility for  enlistment bonuses include data on occupational fill rates and available  training slots for particular occupations. Models for determining  reenlistment bonuses include data on the retention rates of and projected  future shortages in particular occupations.
In addition to using models, the services seek stakeholder input on their  bonus program plans. Stakeholders include personnel managers who have  experience with the occupations being discussed and can contribute  information that cannot be provided by the models, such as whether  servicemembers in a particular occupation are experiencing unusual  difficulties. Stakeholder input is provided differently across the services  but is consistently used to make adjustments to data provided by the  models. For example, the Army and the Navy consider stakeholder input  through formal meetings. Specifically, the Army formally holds Enlisted  Incentives Review Boards each quarter that include personnel from the  Army Recruiting Command and the Army Human Resources Command.  During these board meetings, stakeholders discuss which occupations  should receive a bonus, whether these bonuses are appropriately set, and  come to a consensus on how much each bonus should be during the next  quarter. The Navy, in addition to a monthly review of the bonus program,  formally convenes a working group three to four times per year for  reenlistment bonuses where personnel managers responsible for  monitoring and managing the retention health of occupations present  opinions and analysis as to whether the recommendations for bonus  amounts are set appropriately or need adjustments. In contrast, the Marine  Corps and Air Force utilize a less formal approach to stakeholder input.  For example, to obtain input on their projected enlistment bonus award  plans, Marine Corps and Air Force bonus program managers seek input  from their recruiting and human resources personnel, who provide their  perspectives on projected future shortages. As part of the process, all  services stressed that regardless of whether bonus levels are produced by  models or stakeholder input, in the end, bonus amounts must be adjusted  to fit into the services’ fiscal budgets.
OSD guidance allows the military departments flexibility to offer bonuses  to occupations that they are having difficulty filling. OSD guidance to the  services on administering their bonus programs states that the intent of  bonuses is to influence personnel inventories in situations in which less  costly methods have proven inadequate or impractical. The guidance also  states that the military skills selected for the award of bonuses must be  essential to the accomplishment of defense missions. Additionally, the  guidance sets forth some general criteria to use when identifying bonus- eligible occupations. For enlistment bonuses, the Secretaries of the  military departments are to consider, among other things, the attainment  of total accession objectives, priority of the skill, year group and pay grade  shortages, and length and cost of training. For reenlistment bonuses, the  Secretaries of the military department concerned are to consider, among  other things, critical personnel shortages, retention in relation to  objectives, high training cost, and arduousness or unattractiveness of the  occupation. These general criteria provided by OSD allow each Secretary  of a military department to determine what occupations should be  considered essential and therefore eligible for bonuses. Because the  criteria OSD lists in its guidance are broadly defined and because the  Secretaries of the military departments are purposely given the flexibility  to adjust which occupations they believe need to be offered bonuses as  conditions change, the departments are given the authority to award  bonuses to any occupation under certain conditions. That is, all service  occupations could be considered essential to the accomplishment of  defense missions if the department is experiencing difficulty filling them.  Service officials told us that this flexibility allows the departments to  adjust bonuses quickly as market conditions change. An Army official  explained that, for example, in some cases an occupation such as cook  may need a bonus because personnel do not want to be assigned to it.

		The Services Monitor the Performance of Their Bonus Programs but Lack Information on the Most Cost-Effective Bonus Amounts

All services regularly monitor the performance of their enlistment and  reenlistment bonus programs. With respect to measuring the performance  of their enlistment bonus programs, all services said that they  continuously monitor their progress in meeting recruiting goals. For  example, Army officials told us that they use the quarterly recruiting  numbers within each occupational specialty as indicators of the  effectiveness of the Army’s enlistment bonus program. If they notice that  an occupation is lagging behind or that recruiters have been particularly  successful in meeting goals for an occupation, the quarterly Enlisted  Incentives Review Board provides an opportunity for the Army to move  that occupation to a level associated with a higher or lower bonus  amount. The Army then continues to monitor its recruiting numbers to  gauge whether this change has worked. With respect to measuring the  performance of the retention bonus programs, all services monitor their  progress in meeting their retention goals. For example, Navy officials said  they review the percentage of reenlistment goals achieved for each  occupational specialty and use that information to increase or decrease  bonus amounts.
With both enlistment and reenlistment bonuses, the services take a certain  amount of risk when changing bonus amounts, but officials told us that  continuous monitoring of the recruiting and retention data allows them to  make necessary adjustments. Moreover, officials also told us that they are  not willing to take too much of a risk with some critical occupations. For  example, Navy officials said that, given the length and cost of training  nuclear personnel, the high qualifications that these personnel must have,  and the high marketability of their skills in the private sector, the Navy  sees bonuses for these occupations as essential. The services have been  relying on the analyses of recruiting and retention data to determine  whether their bonus programs have produced intended results, but these  data alone are not sufficient to help ensure that bonus levels are set at the  most cost-effective amounts. Just as for any government program,  resources available for bonuses are finite, and increasing bonuses for  some groups or occupations must come at the expense of incentives for  other groups or occupations. Service officials agreed that their existing  approach of monitoring the performance of bonus programs by looking at  recruiting and retention data does not tell them what specific bonus  amounts are most cost-effective and whether their goals could be achieved  with a smaller bonus amount or a different, and possibly less costly,  combination of incentives.
OSD guidance indicates that officials must exercise bonus authorities in a  cost-effective manner. According to DOD Directive 1304.21 and DOD  Instruction 1304.29, bonuses are intended for specific situations in which  less costly methods have proven inadequate or impractical. DOD Directive  1304.21 also states that it is wasteful to use financial incentives when less  costly but equally effective actions are available. Further, in its 2006  report, the Defense Advisory Committee on Military Compensation set  forth principles for guiding the military compensation system, one of  which called on the military compensation system to meet force  management objectives in the least costly manner.
There is an extensive body of research on bonus effectiveness, but much  of it does not assess the cost-effectiveness of specific bonus amounts.  Over the years, the services and other organizations have conducted  extensive research on the use of cash incentives, some of it dating back to  the 1960s and 1970s. This research has generally shown that bonuses have  a positive effect on the recruitment and retention of military personnel,  even after controlling for a variety of demographic, economic, and other  factors. Additionally, a study issued by RAND in 1986 specifically  considered the cost-effectiveness of bonuses. RAND analyzed the results  of a nationwide experiment to assess the effects of varying enlistment  bonus amounts, showing that cash bonuses were extremely effective at  channeling high-quality individuals into the traditionally hard-to-fill  occupations. Furthermore, RAND found that increased bonuses had the  effect of both bringing more people into the service and lengthening the  terms of their commitment. However, according to DOD and the  researchers interviewed, there is no recent work focused on the cost- effectiveness of specific bonus amounts.
We cited some of this research in a 1988 report on the advantages and  disadvantages of a draft versus an all-volunteer force and, more recently,  in a 2009 report on the Army’s use of incentives to increase its end  strength. In the 2009 report, which focused on the Army, we determined  that the Army did not know whether it was paying more than it needed to  pay to get a cost-effective return on investment, and we recommended that  the Army build on available analyses to set cost-effective enlistment and  reenlistment bonuses in order to avoid making excessive payments. DOD  concurred with our recommendation and commissioned RAND to conduct  a study to implement it. The study, released in June 2010, found that  bonuses were an important and flexible tool in meeting recruiting and  retention objectives, particularly for the Army, but did not assess whether  bonuses were set too high.  According to DOD, a detailed study for bonus  amounts was beyond the scope of the RAND study. DOD wanted that  study to determine whether bonuses in general were an efficient and  effective use of resources for recruiting and retention and how these  bonuses compared with other incentives. DOD believes that determining  what bonus amounts are optimal is significant and complex enough to  warrant its own study and plans to pursue that line of effort when  sufficient resources are available. At present, however, it has no  immediate plans to do so.
We recognize that identifying optimal bonus amounts is challenging  because such studies must control for the numerous, changing factors that  affect individuals’ recruiting and retention decisions, such as the  unemployment rate, the deployment rate resulting from overseas  operations, and the changing public perceptions of the war. Despite these  challenges, research organizations and some of the services have been  considering various approaches that could be used for that purpose.  Several research organizations have developed specific methodologies for  conducting studies on the cost-effectiveness of bonuses. For example,  one research organization submitted a proposal to DOD and the Army to  develop an econometric model for determining the most cost-effective  bonus amounts for different occupations. Another research organization is  considering the use of an experiment, in combination with an  econometric model, for determining the minimal amounts of bonuses  needed to fill different occupations and had informally shared its ideas  with DOD. The researchers interviewed considered the costs of such  research to be modest and expected the benefits of any potential  improvements to the services’ bonus programs resulting from such  research to outweigh the costs, particularly given the billions of dollars  that the services have spent on bonuses over the years.
According to DOD, service officials are interested in this type of research,  which would provide them with information needed to more effectively  manage limited resources in their bonus programs. In fact, some services  have already taken steps toward obtaining this information. For example,  the Army has funded an econometric model developed by a research  organization to predict the likelihood of applicants’ choosing particular  occupational specialties as a function of various factors, including  bonuses offered. According to an Army official, this model would allow  the Army to evaluate alternative cash incentive packages needed to fill  specific occupations, thus optimizing its recruiting resources. The Navy  uses an econometric model developed 10 years ago by a research  organization, which Navy officials told us allows them to predict the  extent to which a mix of recruiting resources, including varying bonus  amounts, would enable them to meet recruiting goals. Although Navy  officials said that this model does not provide information on recruiting  outcomes within specific occupations, it helps them determine which  bonus amounts would be needed to meet the overall recruiting mission.
While efforts to develop ways to assess the cost-effectiveness of bonuses  have been made by some research organizations and have generated  interest at the individual service level, OSD has not coordinated research  in this area. The Principal Deputy Under Secretary of Defense for  Personnel and Readiness is responsible for monitoring the bonus  programs of the military services and recommending to the Secretary of  Defense measures required to attain the most efficient use of resources  devoted to the programs. The Office of the Under Secretary of Defense for  Personnel and Readiness therefore has a role in monitoring individual  service efforts to assess the cost-effectiveness of bonuses, which could be  facilitated by information-sharing among the services on this issue. OSD  recognizes the importance of having information on the cost-effectiveness  of bonuses and using that information to guide the services’ management  of their bonus programs. OSD officials stated that they are in constant  contact with the services regarding their use of bonuses and facilitate  conferences, working groups, and other meetings that allow the services  to discuss their incentive programs. Moreover, the development of  statistical models for assessing bonus effectiveness is one of the fiscal  year 2012 research priorities for the Accessions Policy office within the  Office of the Under Secretary of Defense for Personnel and Readiness.
However, to date, OSD has not facilitated the exchange of information  among the services on how best to conduct research on the cost- effectiveness of bonuses, what efficiencies could be gained from such  efforts, and whether to jointly undertake them. Without such information- sharing, the services may not be able to fully take advantage of existing  and emerging methodologies for assessing cost-effectiveness, share  lessons learned, and ultimately obtain critical information needed to know  whether they are getting the best return on their bonus investments.

	DOD Is in the Process of Increasing Its Flexibility in Managing Special and Incentive Pays but Lacks Baseline Measures to Assess Outcomes

DOD has begun to increase its flexibility in managing special and incentive  pays, as authorized by the National Defense Authorization Act for Fiscal  Year 2008. According to DOD, special and incentive pays are intended to  provide the services with flexible compensation dollars that can be used to  address specific staffing needs and other force management issues that  cannot be efficiently addressed through basic pay increases. However,  while DOD has discretionary authority to determine the amount and the  recipients of enlistment and reenlistment bonuses based on personnel  needs, it did not previously have similar discretion to adjust pays where  the amounts and eligibility criteria are specified by law. According to  DOD, a significant number of special and incentive pays paid to military  personnel have been statutorily prescribed. In our review of 15 special and  incentive pays, 6 are currently entitlement pays and accounted for $3.9  billion, or 29 percent, of the $13.6 billion expended on the 15 special and  incentive pays from fiscal years 2006 through 2010. Of the 15 pays we  reviewed, DOD has not yet exercised its authority to consolidate all of  them and thereby increase its flexibility in managing who receives these  pays and how much recipients are paid. Specifically, DOD has not yet  consolidated pays in the following categories: Aviation Career Incentive  Pay; Career Sea Pay; Submarine Duty Incentive Pay; Hazardous Duty  Incentive Pay, which includes Crew Member Flying Duty Pay; and  Parachute Duty Pay.
The differences in flexibility DOD has in managing entitlement pays that  are currently required by statute compared with discretionary pays are  illustrated by the two special and incentive pays that the services give to  aviation officers: Aviation Career Incentive Pay (ACIP) and Aviation  Continuation Pay (ACP). The services have specific statutory guidelines  that require certain levels of payment and define the personnel who  receive ACIP until this pay is consolidated with other flight pays. If a  servicemember meets the aviation criteria outlined in 37 U.S.C. § 301a, he  or she is entitled to this special pay on a graded scale that depends on  years of flying experience. The payments range from $125 to $840 a month.  Officer aviators who meet the statutory criteria are entitled by law to this  monthly supplement regardless of individual assignments. In other  words, payment does not vary according to type of aircraft, training  required, or any other measure services might use to differentiate aviator  assignments. By comparison, ACP is a special pay authority that is used as  a retention bonus for officers who have completed their active-duty  service obligations to incentivize them to remain on active duty. Unlike the  restrictions currently applicable to administering ACIP, DOD and the  services have the discretion to decide who should get ACP and how much  to pay—-up to the statutory maximum of $25,000 per year.
The flexibility the services currently have in administering ACP allows  them to use the pay differently from year to year according to their needs.  For example, over the 5-year period we reviewed, the Marine Corps  offered the lowest amounts of ACP, ranging from a minimum of $2,000 to a  maximum of $20,000. The Air Force and the Army offered the highest  levels of ACP, ranging from $12,000 to $25,000; however, despite having  the same range, the two services differ on the average bonus amounts  awarded, with averages of $20,000 and $15,000 respectively. Each service  also determines which of its aviators should receive the highest amounts  of bonus based on its determination of an aviation specialty as critical and  requiring a bonus. For example, as DOD reported in its 2010 report to  Congress on Aviation Continuation Pay, in the Air Force’s fiscal year  2010 program, the highest amount—$25,000 per year—was offered to  pilots who had just completed their undergraduate flying training service  commitments and who signed a 5-year agreement. Uncommitted pilots and  combat systems officers operating remotely piloted aircraft were offered  $15,000 a year for 3-, 4-, or 5-year contracts; air battle managers were  offered the same amount for 5-year contracts. By comparison, the Army  offered $25,000 per year to Special Operations Aviation Regiment pilots  and $12,000 per year to pilots who were Tactical Operations Officers. Each  of the services, with the exception of the Army, has decreased the number  of servicemembers receiving ACP from fiscal years 2006 to 2010 (see table  2). All services decreased their ACP programs in fiscal year 2010, but each  service justified the program as necessary. For example, the Army  reported that shortages remained in critical military occupational  specialties and incentives were necessary to increase pilot inventories,  support present readiness, and enable future transformation. The Air  Force stated that the demand for pilots continued to exceed supply.  Specifically, it required a large eligibility pool of pilots for remotely piloted  aircraft, special operations forces pilots, and air operations center and air  liaison officer pilots.
In The Tenth Quadrennial Review of Military Compensation, DOD  identified limited flexibility in managing its special pays as a key weakness  in its compensation system. DOD further stated that some statutory pays  were rarely reviewed, updated, or discontinued, even when the staffing  concerns they were designed to address had abated. In order to prevent  special and incentive pays from becoming permanent entitlements paid to  servicemembers because of statutory requirements, DOD recommended in  this review that the more than 60 special and incentive pays be replaced  with 8 broad discretionary special and incentive pay authorities that will  allow DOD and the services discretion to determine recipients and  amounts. This authority was provided in the National Defense  Authorization Act for Fiscal Year 2008 and requires DOD to transition to a  consolidated structure over a 10-year period. According to DOD’s  consolidation plan, the transition will be complete in fiscal year 2014 (see  fig. 6). However, OSD officials stated that some pays will be transitioned  sooner. For example, OSD is currently preparing a draft policy for  transitioning ACP and ACIP, which is expected to be approved this fiscal  year by the Secretary of Defense, 1 year ahead of the originally planned  date.
The Tenth Quadrennial Review identified three benefits of consolidating  the statutory authorities for DOD’s special and incentive pays. These  benefits include (1) increasing the ability of the services to better target  resources to high priority staffing needs and respond to changing  circumstances; (2) decreasing the number of pays and therefore reducing  the administrative burden of managing over 60 different pays with  different sets of rules and budgets; and (3) increasing performance  incentives, by allowing the services to link some special and incentive pay  grades to high performance by motivating and rewarding effort and  achievement. Under the consolidation, for example, aviator pays will be  combined into a single pay authority entitled “Special Aviation Incentive  Pay and Bonus Authorities for Officers,” allowing the services to make  payments to aviators depending on staffing needs and other force  management issues specific to each service. This consolidation could  result in many differences in the ways the services administer these pays.  For example, certain aviator occupations may no longer receive an  incentive, or incentives could vary by specific occupation or years of  service.
DOD has identified perceived benefits of consolidating special and  incentive pays, but it does not have baseline metrics in place to measure  the effects of its consolidation effort. As we previously reported,  organizations should establish baseline measures to assess progress in  reaching stated objectives. DOD’s January 2009 report on the  consolidation effort, the latest such report available, stated that it had only  converted a limited number of pays to the new consolidated pay authority,  but this report did not outline how effectiveness will be measured for  implementing these pays. OSD officials told us that they plan to revise the  relevant DOD instructions giving the services guidelines on how to  administer the new programs but they did not say these guidelines would  include any performance metrics for measuring the effects of the  consolidation effort. As a result, DOD may not be positioned to monitor  the implementation of this consolidation to determine whether it is in fact  resulting in greater flexibility and more precise targeting of resources and  what impact the consolidation is having on DOD’s budget.

	Conclusions

From fiscal years 2006 through 2010, the Army’s contracted amounts for  bonuses rose more dramatically than the other services’, as the Army  increased its force size and deployed vast numbers of servicemembers to  Iraq and Afghanistan. Conversely, the Army was able to more dramatically  decrease its bonus contract amounts as the economy declined, the  unemployment rate rose, and the Army was not trying to grow its overall  force. The Army, and the other services to some extent, demonstrated that  they can use bonuses flexibly in response to changing market conditions,  but they still do not know whether they are paying more than they need to  pay to attract and retain enlisted personnel. Also, at present, DOD has no  formal method of facilitating discussions among the services on  efficiencies to be gained from assessing the cost-effectiveness of their  incentive programs. Although determining optimal bonus amounts is  challenging, coordination of research efforts to determine the return on  investment of DOD’s various programs will become increasingly important  as constraints on fiscal resources increase. Moreover, determining optimal  bonus amounts will help DOD adjust the amounts for occupations due to  changing market conditions. Also, DOD has not yet fully implemented its  consolidation authorities, which would give it more flexibility to target its  special and incentive pays to those servicemembers it needs most to retain  and to discontinue paying some servicemembers these pays when it is no  longer necessary to retain them. The statutory requirement to consolidate  DOD’s more than 60 pays should move DOD toward more flexibility in  managing its incentive programs, but it will be critical for DOD to  continually monitor its progress toward this goal as it completes the  consolidation of its special and incentive pays over the next several years.

	Recommendations for Executive Action

We recommend that the Secretary of Defense direct the Under Secretary  of Defense for Personnel and Readiness to take the following two actions:    Coordinate with the services on conducting research, as appropriate,  to determine optimal bonus amounts.
As the consolidation of the special and incentive pay programs is  completed over the next 7 years and the instructions directing the  services on how to administer the new programs are revised, monitor  the implementation of this consolidation to determine whether it is in  fact resulting in greater flexibility and more precise targeting of  resources and what impact the consolidation is having on DOD’s  budget.

	Agency Comments

In written comments on a draft of this report, DOD concurred with both  our recommendations. DOD stated that it would find the line of research  we discuss in our first recommendation to be beneficial and has discussed  this issue on a number of occasions. DOD also said that it will consider  this a priority research project and begin it when funds are available. DOD  stated that it also agrees, as we discussed in our second recommendation,  with the appropriateness of monitoring the implementation of the  consolidated authorities to help ensure that they do result in greater  flexibility and more precise targeting of resources. However, it stated that,  while the department believes that the new authorities will result in more  precise targeting of resources, it pointed out that the cost of special and  incentive pays could increase or decrease based on market conditions,  such as the economy. (DOD’s comments appear in their entirety in app. II.)
We will send copies of this report to the appropriate congressional  committees. We will also send copies to the Secretary of Defense; the  Under Secretary of Defense for Personnel and Readiness; the Secretaries  of the Army, the Navy, and the Air Force; and the Commandant of the  Marine Corps. The report will be available at no charge on GAO’s Web site  at http://www.gao.gov.
If you or your staff have any questions on this report, please contact me at  (202) 512-3604 or farrellb@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.

Appendix I: Scope and Methodology

This review included an analysis of enlistment and reenlistment bonuses  for enlisted personnel, as well as special pays for officers and enlisted  personnel in the active components of the Army, the Navy, the Marine  Corps, and the Air Force. We analyzed data on 15 special and incentive  pays across the services for fiscal years 2006 through 2010, which  represented the top five expenditures for special and incentive pays each  year for each service. We focused on pays that were available to most  servicemembers. For this reason, we excluded medical pays.
To conduct our work, we analyzed service data on enlistment and  reenlistment bonuses, reviewed Department of Defense (DOD) and service  regulations related to the use of bonuses and special and incentive pays;  interviewed DOD and service officials on the processes and  methodological tools in place to identify occupations eligible for bonuses  and steps taken to assess the effectiveness of their bonus programs;  observed two services’ meetings that are convened to determine which  occupations should be eligible for bonuses; interviewed researchers  knowledgeable about literature on bonus effectiveness; and reviewed  selected studies on this subject. We interviewed DOD officials in the  Washington, D.C., metropolitan area and conducted a site visit to  Millington, Tennessee, to observe the Navy’s Working Group convened to  determine which occupations should be eligible for bonuses. In the course  of our work, we contacted or visited the organizations and offices listed in  table 3.
To determine trends in the use of enlistment and reenlistment bonuses, we  requested and analyzed service data on enlistment and reenlistment  bonuses contracted from fiscal year 2006 through fiscal year 2010. For  enlistment bonuses, the services provided data on the amounts contracted  for various types of enlistment bonuses that they used for the purpose of  attracting individuals into the service, such as bonuses awarded for  entering specific occupational specialties, having certain qualifications, or  leaving for basic training within a specific amount of time. Some of the  bonuses, such as those paid through the Army’s Advantage Fund, were  only available in some of the years for which the data were requested. In  conducting our analyses of enlistment bonuses, we combined the amounts  that the services contracted for all enlistment bonuses in a given fiscal  year.
For reenlistment bonuses, all services provided data on the amounts  contracted in the Selective Reenlistment Bonus (SRB) program, which  offers monetary incentives to qualified personnel who reenlist in certain  occupations. We assessed the reliability of each service’s enlistment and  reenlistment bonus data by obtaining information from the services on  their systems’ ability to record, track, and report on these data, as well as  the quality control measures in place to ensure that the data are reliable  for reporting purposes. We found enlistment and reenlistment data  reported by the services to be sufficiently reliable to demonstrate trends in  the services’ use of these incentives. In order to observe the trends in the  use of enlistment and reenlistment bonuses over time, we adjusted the  data provided by the services for inflation by using the Consumer Price  Index.
To evaluate the extent to which the services have processes to designate  occupations that require bonuses and whether bonus amounts are  optimally set, we reviewed DOD and service regulations pertaining to their  processes for designating bonus-eligible occupations. We also interviewed  relevant officials from the Office of the Secretary of Defense (OSD) and  the services with responsibilities for designating occupations as bonus- eligible on the processes in place to determine which occupations should  receive bonuses, including the analytical tools such as statistical models  used for this purpose. Additionally, we discussed with them how the  effectiveness of their bonus programs is measured, requesting any  available data to demonstrate the effectiveness of their bonus programs.  We also observed two services’ meetings that are convened to determine  which occupations should be eligible for bonuses.
To determine whether bonus amounts are optimally set, we requested and  reviewed the data used by the services to gauge their bonus programs’  effectiveness. All the services indicated that they use accession and  retention data for that purpose, and we obtained these data for all the  services for fiscal years 2006 through 2010 from OSD. In addition, we  contacted officials from the Army Research Institute, the Center for Naval  Analyses, the Institute for Defense Analyses, RAND, and the Lewin Group  to discuss their past and proposed work on bonus effectiveness. We also  reviewed selected studies on bonus effectiveness.
To determine how much flexibility DOD has in managing selected special  and incentive pays, we requested and analyzed service data on the top five  special pays (according to overall expended dollar amount by service) for  officer and enlisted active-duty personnel from fiscal year 2006 through  fiscal year 2010. The list of the top five pays in each of these years varied  by service, as shown in table 4.
For the purposes of this objective, we excluded enlistment and selective  reenlistment bonuses because we addressed them in detail in previous  objectives. We also excluded the Critical Skills Retention Bonus for  enlisted personnel. In addition, we excluded medical pays for enlisted  personnel and officers because we focused on pays that were available to  most servicemembers.
We assessed the reliability of each service’s special pays data by obtaining  information from the services on their systems’ ability to record, track,  and report on these data, as well as the quality control measures in place  to ensure that the data are reliable for reporting purposes. We found the  special pays data reported by the services to be sufficiently reliable for  demonstrating trends in the services’ use of these incentives over time.
In addition, we interviewed DOD officials on their role in managing special  pay programs, the amount of flexibility they have over them, and their  ongoing efforts to consolidate these pays. We also requested and reviewed  DOD reports and other documents pertaining to special pays and the  consolidation effort, such as the 2010 report to Congress on Aviation  Continuation Pay and the 2009 report to Congress on the implementation  plan for the consolidation of special pays.
We conducted this performance audit from September 2010 through June  2011 in accordance with generally accepted government auditing  standards. These standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our research objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

	GAO Contact

	Acknowledgments

In addition to the contact above, Lori Atkinson, Assistant Director; Natalya  Barden; Darreisha Bates; Timothy Carr; Grace Coleman; K. Nicole Harms;  Charles Perdue; Terry Richardson; Beverly Schladt; Amie Steele; Michael  Willems; and Jade Winfree made key contributions to this report.

Summary:
Why GAO Did This Study

The Senate report to accompany the 2011 Defense authorization bill directed GAO to assess the Department of Defense's (DOD) use of cash incentives to recruit and retain highly qualified individuals for service in the armed forces. This report (1) identifies recent trends in DOD's use of enlistment and reenlistment bonuses, (2) assesses the extent to which the services have processes to determine which occupational specialties require bonuses and whether bonus amounts are optimally set, and (3) determines how much flexibility DOD has in managing selected special and incentive pays for officer and enlisted personnel. GAO analyzed service data on bonuses and special and incentive pays, reviewed relevant guidance and other documentation from DOD and the services, interviewed DOD and service officials, and observed two working groups that were determining bonus amounts.

What GAO Found

DOD engaged in enlistment and reenlistment contracts for bonuses to servicemembers that totaled $1.2 billion in fiscal year 2010, down 58 percent from fiscal year 2008. Contracted amounts peaked in the Army and the Navy in fiscal year 2008 and declined thereafter; amounts peaked for the Marine Corps and the Air Force in fiscal year 2009 and then declined. From fiscal years 2006 through 2010, the services contracted a total of $11 billion for bonuses, with the Army accounting for 52 percent, the Navy, 24 percent, the Marine Corps, 16 percent, and the Air Force, 9 percent. About $4.5 billion of the $11 billion was contracted for enlistment bonuses and $6.6 billion for reenlistment bonuses. With the exception of the Army, the amounts the services contracted were higher for reenlistment than enlistment bonuses during this time period. For example, the Army's average enlistment bonus was higher than that of the other services in fiscal years 2006 through 2008, while the Navy's was highest in fiscal years 2009 and 2010. On the other hand, the Army's average reenlistment bonus was smaller than those of the other services during this period. The services have processes that include the analysis of data on how difficult it is to recruit and retain particular occupations and use these processes to adjust bonuses, but they do not know whether they are paying more than they need to for these purposes. DOD guidance allows the departments to offer a bonus to any occupation that they have difficulty recruiting or retaining, thereby allowing them to adjust their policies to changing market conditions. However, though much research has been conducted on bonuses' effects on enlistment and retention, DOD does not know whether the bonus amounts the services offer are optimal. Efforts to develop ways to assess the cost-effectiveness of bonuses have been made by some research organizations and have generated interest at the individual service level, but there has been no coordinated DOD-wide work to facilitate information-sharing among the services on this issue. Without such information-sharing, the services may not be able to fully take advantage of existing and emerging methodologies for assessing whether they are getting the best return on their bonus investments. DOD has begun to increase its flexibility in managing special and incentive pays while consolidating them into eight categories. GAO reviewed 15 of DOD's more than 60 special and incentive pays and found that during fiscal years 2006 through 2010, it spent $13.6 billion on those pays and that for about 30 percent of that amount, DOD was unable to adjust numbers of recipients or amounts based on market conditions because they had not yet been consolidated and were established in legislation. DOD's consolidation of special and incentive pays will allow the services more flexibility in managing them. However, at present, DOD has not established metrics that will enable it to determine whether this consolidation is resulting in greater flexibility as it transitions to the new categories by fiscal year 2014. As a result, DOD may not be positioned to measure future progress in meeting the intended goal of the consolidation, which is to give the services more flexibility.

What GAO Recommends

GAO recommends that DOD (1) coordinate with the services to facilitate discussions on conducting research, as appropriate, to determine optimal bonus amounts and (2) monitor the implementation of its consolidation of special and incentive pays to determine whether it is resulting in greater flexibility and what impact the consolidation is having on DOD's budget. In commenting on a draft of this report, DOD concurred with both recommendations.