The United States Army War College

U.S. ARMY WAR COLLEGE

CENTER for

STRATEGIC

LEADERSHIP and

DEVELOPMENT

The United States Army War College educates and develops leaders for service 

at the strategic level while advancing knowledge in the global application 

of Landpower.

The purpose of the United States Army War College is to produce graduates 

who are skilled critical thinkers and complex problem solvers. Concurrently, 

it is our duty to the U.S. Army to also act as a “think factory” for commanders 

and civilian leaders at the strategic level worldwide and routinely engage 

in discourse and debate concerning the role of ground forces in achieving 

national security objectives.

The Strategic Studies Institute publishes national 

security and strategic research and analysis to influence 

policy debate and bridge the gap between military 

and academia.

The Center for Strategic Leadership and Development 

contributes to the education of world class senior 

leaders, develops expert knowledge, and provides 

solutions to strategic Army issues affecting the national 

security community.

The Peacekeeping and Stability Operations Institute 

provides subject matter expertise, technical review, 

and writing expertise to agencies that develop stability 

operations concepts and doctrines.

The Senior Leader Development and Resiliency program 

supports the United States Army War College’s lines of 

effort to educate strategic leaders and provide well-being 

education and support by developing self-awareness 

through leader feedback and leader resiliency.

The School of Strategic Landpower develops strategic 

leaders by providing a strong foundation of wisdom 

grounded in mastery of the profession of arms, and 

by serving as a crucible for educating future leaders in 

the analysis, evaluation, and refinement of professional 

expertise in war, strategy, operations, national security, 

resource management, and responsible command.

The U.S. Army Heritage and Education Center acquires, 

conserves, and exhibits historical materials for use 

to support the U.S. Army, educate an international 

audience, and honor Soldiers—past and present.

U.S. Army War College

Senior Leader Development and Resiliency

SLDR
STRATEGIC

STUDIES

INSTITUTE

The Strategic Studies Institute (SSI) is part of the U.S. Army War 

College and is the strategic-level study agent for issues related 

to national security and military strategy with emphasis on 

geostrategic analysis.

The mission of SSI is to use independent analysis to conduct 

strategic studies that develop policy recommendations on:

• Strategy, planning, and policy for joint and combined 

 employment of military forces;

• Regional strategic appraisals;

• The nature of land warfare;

• Matters affecting the Army’s future;

• The concepts, philosophy, and theory of strategy; and,

• Other issues of importance to the leadership of the Army.

Studies produced by civilian and military analysts concern 

topics having strategic implications for the Army, the Department of 

Defense, and the larger national security community.

In addition to its studies, SSI publishes special reports on topics 

of special or immediate interest. These include edited proceedings 

of conferences and topically oriented roundtables, expanded trip 

reports, and quick-reaction responses to senior Army leaders.

The Institute provides a valuable analytical capability within the 

Army to address strategic and other issues in support of Army 

participation in national security policy formulation.

i

iii

Strategic Studies Institute

and

U.S. Army War College Press

PAID TO PERFORM:

Aligning Total Military Compensation

With Talent Management

Roy A. Wallace

Michael J. Colarusso

Andrew O. Hall

David S. Lyle 

Michael S. Walker

June 2015

The views expressed in this report are those of the authors and 

do not necessarily reflect the official policy or position of the 

Department of the Army, the Department of Defense, or the U.S. 

Government. Authors of Strategic Studies Institute (SSI) and 

U.S. Army War College (USAWC) Press publications enjoy full 

academic freedom, provided they do not disclose classified 

information, jeopardize operations security, or misrepresent 

official U.S. policy. Such academic freedom empowers them to 

offer new and sometimes controversial perspectives in the interest of furthering debate on key issues. This report is cleared for 

public release; distribution is unlimited.

*****

This publication is subject to Title 17, United States Code, 

Sections 101 and 105. It is in the public domain and may not be 

copyrighted.
iv

*****

Comments pertaining to this report are invited and should 

be forwarded to: Director, Strategic Studies Institute and U.S. 

Army War College Press, U.S. Army War College, 47 Ashburn 

Drive, Carlisle, PA 17013-5010. 

*****

All Strategic Studies Institute (SSI) and U.S. Army War 

College (USAWC) Press publications may be downloaded free 

of charge from the SSI website. Hard copies of this report may 

also be obtained free of charge while supplies last by placing 

an order on the SSI website. SSI publications may be quoted 

or reprinted in part or in full with permission and appropriate 

credit given to the U.S. Army Strategic Studies Institute and U.S. 

Army War College Press, U.S. Army War College, Carlisle, PA. 

Contact SSI by visiting our website at the following address: 

www.StrategicStudiesInstitute.army.mil.

*****

The Strategic Studies Institute and U.S. Army War 

College Press publishes a monthly email newsletter to update 

the national security community on the research of our analysts,

recent and forthcoming publications, and upcoming conferences sponsored by the Institute. Each newsletter also provides 

a strategic commentary by one of our research analysts. If you 

are interested in receiving this newsletter, please subscribe on the 

SSI website at www.StrategicStudiesInstitute.army.mil/newsletter.

*****

This volume is the 8th in a series of monographs on officer 

talent management.

7. Creating an Effective Regional Alignment Strategy for the U.S. 

Army, November 2014, authored by Major Raven Bukowski, Major John Childress, Lieutenant Colonel (Ret) Michael J. Colarusso, 

Lieutenant Colonel David S. Lyle.
v

6. Towards a U.S. Army Officer Corps Strategy for Success: Employing Talent, May 2010, authored by Colonel Casey Wardynski, 

Lieutenant Colonel David S. Lyle, and Lieutenant Colonel (Ret) 

Michael J. Colarusso.

5. Towards a U.S. Army Officer Corps Strategy for Success: Developing Talent, March 2010, authored by Colonel Casey Wardynski, 

Lieutenant Colonel David S. Lyle, and Lieutenant Colonel (Ret) 

Michael J. Colarusso.

4. Accessing Talent: The Foundation of a U.S. Army Officer Corps 

Strategy, February 2010, authored by Colonel Casey Wardynski, 

Lieutenant Colonel David S. Lyle, and Lieutenant Colonel (Ret) 

Michael J. Colarusso.

3. Towards a U.S. Army Officer Corps Strategy for Success: Retaining Talent, January 2010, authored by Colonel Casey Wardynski, Lieutenant Colonel David S. Lyle, and Lieutenant Colonel 

(Ret) Michael J. Colarusso.

2. Talent: Implications for a U.S. Army Officer Corps Strategy, 

November 2009, authored by Colonel Casey Wardynski, Lieutenant Colonel David S. Lyle, and Lieutenant Colonel (Ret) Michael J. Colarusso.

1. Towards a U.S. Army Officer Corps Strategy for Success: A 

Proposed Human Capital Model Focused upon Talent, April 2009, authored by Colonel Casey Wardynski, Lieutenant Colonel David 

S. Lyle, and Lieutenant Colonel (Ret) Michael J. Colarusso.

ISBN 1-58487-692-1

vii

CONTENTS

Foreword .......................................................................ix

Summary .......................................................................xi

Introduction—The Case for a Complete 

Compensation Overhaul ........................................ 1

Background—Talent Management as a 

Compensation Change Framework .........................7

Principle #1—Cost Effective................................ 17

Principle #2—Competitive and Equitable ..............29 

Principle #3—Flexible ........................................... 37 

Principle #4—Performance Driven ...................... .41

Principle #5—Supportable and Executable .............47

Conclusions .....................................................53

Endnotes .......................................................................55 

About the Authors .................................................... 65

ix

FOREWORD

The United States finds itself at a profound inflection point. Since World War II, its national security 

threats have tended to accumulate rather than diminish. While U.S. military capabilities remain more advanced than that of any other state, an increasingly 

interconnected global economy has allowed potential 

adversaries to shrink the technological lead currently 

enjoyed by America’s Armed Forces. Additionally, 

U.S. economic power has declined relative to that of 

other nations, steadily narrowing its defense spending advantage. Meanwhile, increasing Federal budget austerity has focused Congress upon reigning in 

defense costs, particularly in the personnel realm. 

The authors of this monograph believe that talent management—the science of creating a higher 

performing, more productive, and more satisfied 

workforce—is critical to dealing with these national 

security challenges. They argue that, instead of making across-the-board cuts to service member pay 

and benefits, Congress should allow the Department of Defense to implement an integrated talent 

and compensation management redesign, creating a 

far more operationally effective and fiscally efficient 

“force of the future.” They posit that this is possible, 

however, only if the entire military compensation 

system is overhauled: basic pay, pensions, and retirement; incentive and special pays; nonmonetary 

compensation; etc. 

Given the increasing threats and declining budgetary resources described, and as several other recent compensation redesign proposals have been less 
comprehensive in scope, aligning total military compensation with talent management efforts merits close 

attention by government and military leaders alike.

 

 DOUGLAS C. LOVELACE, JR.

 Director

 Strategic Studies Institute and

 U.S. Army War College Press

x
xi

 SUMMARY

Transforming the U.S. military’s personnel management system is critical to long-run American 

national security interests, particularly as increasingly capable peer adversaries emerge. Talent management—the science of creating a higher performing, 

more productive, and more satisfied workforce—is 

critical to confronting these threats, particularly in an 

austere fiscal environment. This transformation cannot take place in a vacuum, however. As an extensive 

body of labor economics literature makes clear, total 

compensation management is an integral part of talent management. As the military changes the way it 

accesses, retains, develops, and employs its people, 

so, too, must it change the ways in which it compensates them. However, the current compensation 

system, rooted in industrial-era labor management 

practices, has outlived its usefulness. It is not linked 

to defined organizational outcomes, rests upon an ineffectual evaluation system, and does little to incentivize performance. Designed to complement an “up 

or out” personnel system that treats people as interchangeable parts, it has been rendered obsolete by 

dramatic changes in the American labor market, fiscal 

constraints, technological advances, and the changing 

nature of information age work.

Using the Army’s Officer Corps as a case study 

upon which a wider compensation model can be built, 

we propose a system that thoughtfully integrates redesigned basic pays and pensions, “monetizes” nonpay 

benefits, and provides additional performance incentives in critical positions demanding organizational 

productivity.
How can we reward . . . and promote people not simply on the basis of when they joined, but . . . on the 

basis of their performance and talent? How can we be 

that kind of organization?

 Secretary of Defense Ashton Carter1

xii
1

PAID TO PERFORM:

Aligning Total Military Compensation

With Talent Management

INTRODUCTION—The Case for a Complete 

Compensation Overhaul

That the pay of the Officers and privates be as follows: 

a captain at 20 dollars per month; a lieutenant at 13 

1/3 dollars; a serjeant [sic] at 8 dollars; a corporal at 

7 1/3 dollars; drummer or trumpeter at 7 1/3 dollars; 

privates at 6 2/3 dollars; to find their own arms and 

clothes.

 Resolution of the Continental Congress, 

 June 14, 17752

Congress has debated military compensation rates 

since the inception of the U.S. Armed Forces. What is 

different today, however, is the impetus for debate. 

While budgetary concerns still appear to dominate, 

the issue at hand is not really a fiscal one but a national security one. As peer competitors operate ever 

closer to the defense technology frontier due to rapid 

economic development and globalization, the U.S. 

military’s long-held advantage in physical capital and 

equipment is waning. This is why human capital investment is more critical than ever before. Equipment 

does not learn, grow, or innovate—individuals and 

organizations do. 

To ensure the Armed Forces retain and extend 

their global people advantage, the Department of 

Defense (DoD) is gradually reworking the military’s 

woefully outmoded, industrial-era personnel system 

to help create a “force of the future.” As new talent 

management practices emerge, sound compensation 
2

management principles must undergird them. Modern economic theory holds that thoughtfully designed 

total compensation is integral to maintaining a highly 

productive workforce. The military’s current compensation system, however, is an artifact of a bygone era.3

As a result, it is not linked to defined organizational 

outcomes, rests upon an ineffectual evaluation system, and does little to incentivize performance. 

This is particularly problematic for Active Duty 

commissioned officers, who (in collaboration with the 

service secretaries) lead program and policy development for the rest of the Armed Forces—Guard and 

Reserve, warrant and enlisted. Because they possess 

such a significant span of control, we have focused 

our analysis accordingly—getting active component 

officer talent and compensation management right is 

a precondition to wider implementation.

Recently, several beltway think tanks and “blue 

ribbon panel-type” commissions have made military 

compensation redesign proposals, most notably the 

Military Compensation and Retirement Modernization Commission (MCRMC).4

 While each proposal 

has merit, collectively they tend to focus upon “runaway” pension and health care components, with 

little or no consideration given to restructuring basic 

pay (military salary). For example, the MCRMC made 

the following assessment of the current basic pay 

table system:

The basic pay table provides simplicity, equity, and 

transparency, and the targeted changes to the pay tables in 2000-2001 proved valuable during the 13 years 

of war. The system of allowances is appropriate and 

strikes the correct balance between Service member 

compensation and financial assistance for expenses.5
3

Perhaps this hands-off approach is because basic pay is considered sacrosanct, particularly while 

service members remain in harm’s way around the 

globe—“shoot if you must this old grey pension, but 

spare your military’s basic pay.” More likely (and despite protestations to the contrary) it is because the 

MCRMC and several other proposals seem focused 

upon cost savings rather than national security—a 

“spend less” rather than “spend better” approach. 

Salary, however, is the centerpiece of any workforce pay and benefits structure. Trying to overhaul 

the military’s antiquated compensation management 

system without fine-tuning basic pay is akin to servicing an engine without checking the oil. Carrying 

the analogy a bit further, the military is a high performance machine fueled by a talented mix of Soldiers, 

Sailors, Airmen and Marines. Overhauling its “compensation engine” can lower operating costs, but only 

as a happy by-product of improving performance. 

Because talent management creates a higher performing workforce, it should be the first tool applied to any 

compensation system overhaul, to include all of its 

components: basic, performance and incentive pays, 

pensions and retirement benefits—the works. 

Unlike the MCRMC, we find the current basic 

pay table problematic. Its central design principle is 

to march officers along lock-step career paths, “up” 

a graduated pay scale and “out” the door, typically 

at 20 years of service.6 In a 21st century context, however, “up or out” personnel management is not a good 

thing. Just like the rest of the America’s skilled labor 

force, today’s officers are healthier, live longer, and are 

lifelong learners. As several recent labor studies suggest, the 40s and 50s are often a worker’s most productive years. Thanks to the military’s antiquated evaluation, promotion, and compensation systems, however, 
4

a great number of officers with high-demand talents 

will be out of uniform by then, poached by the private 

sector, mistakenly culled at mid-career, or lured into 

retirement by generous pension benefits that kick in 

too early.7

A particular flaw in the current officer basic pay 

table is the timing and magnitude of scheduled pay 

increases, which largely ignore changes in officers’ 

“opportunity costs” (the compensation that they 

could command outside of the military) across a typical career timeline. For example, the largest officer pay 

increases occur during Active Duty service obligation 

periods and flatten afterwards, just when officers are 

more vulnerable to private sector poaching. Furthermore, the overarching officer compensation system 

fails to leverage thoughtfully a host of nonmonetary 

compensation benefits that individuals value but that 

have little or no budgetary implications (duty and 

location preference, continuing education, status, job 

satisfaction, family stability, etc.). 

Today’s military compensation system assumes 

that employees value all benefits equally (with cash 

valued above all). This assumption is forced upon the 

services because they do not truly know their officers—

what each wants and the value he or she ascribes to it. 

In economic parlance, this is called an “information 

asymmetry,” and it creates significant disadvantages 

to the Government during wage contract negotiations. 

If the military hopes to compete with the private sector for talent, it must better integrate noncash benefits 

into any total compensation management redesign, 

just as Southwest, Google, General Electric, Proctor & 

Gamble, and Microsoft do. That is why its compensation management system must be built upon a talent 

management approach that recognizes and unleashes 
5

the unique skills, knowledge, and behaviors of every 

service member. 

In the following pages, we propose such a system, 

one attuned to presidential guidance while remaining mindful of sound economic theory, military labor 

demands, and national security considerations. While 

not its raison d’être, our proposal does yield cost savings, a by-product of efficient design. It also provides 

greater flexibility in response to external labor market 

conditions, leverages readily available monetary and 

nonmonetary compensation sources, and includes 

performance incentives to enhance workforce productivity. Again, while our recommendations apply specifically to officer compensation, their guiding principles generalize to the entire military workforce. Of 

note, our total compensation management redesign 

also incorporates a pension overhaul proposal known 

as the “10-15-55” plan.8 This is critical, as pensions are

compensation, albeit of a deferred nature. 

7

BACKGROUND—Talent Management as a 

Compensation Change Framework

There is no such thing as a ‘good man.’ ‘Good for 

what?’ is the question. 

 Peter Drucker9

While we have explained why any new compensation system must rest upon talent management principles, some readers may not yet understand why the 

world’s most formidable military is shifting to this 

new approach.10 The answer is reasonably straightforward—national security demands it. Talent management develops, employs, and rewards a multiplicity 

of abilities across an entire workforce rather than focusing upon a narrow distribution of perceived high 

performers. A deep and broad talent inventory is the 

single best way to mitigate the risks of an uncertain 

threat environment and an increasingly competitive 

labor market. 

In the last 40 years, American labor market demands have shifted to support an ever changing 

economy with fundamentally different work requirements. No longer focused upon physical labor, the 

high-tech, service-centric, information age economy 

that emerged in the 1980s demands a far higher share 

of “knowledge workers,” people who add value and 

increase productivity through creative thinking and 

innovation. The relatively limited supply of these 

workers has also made talent poaching standard practice in the labor market. The era of the “organization 

man,” when bosses unilaterally made employment 

decisions, is over. Today’s knowledge workers are not 

content to stay with one employer for 40 years. They 

value steady employability far more than steady em-
8

ployment, and they are willing to change jobs often to 

secure greater rewards. Faced with this high-demand, 

high-churn, high-skill labor market, employers had to 

change their personnel practices or perish. The firms 

that continued to thrive were usually those that turned 

to talent management. 

The military has been subject to the same information age forces as the American private sector. Gone 

are the days when victory hinged exclusively upon 

masses of men charging across the battlefield behind 

interchangeable combat arms officers. In today’s far 

more complex operating environment, the services 

need and create knowledge workers as well. Unlike 

the private sector, however, military manpower management practices have seen little innovation since 

World War II. That is now changing, however. The 

Armed Forces are finally beginning to innovate in the 

personnel arena, applying many of the same talent 

management techniques that have made their corporate cousins hypercompetitive in a dynamic global 

environment, and the current defense secretary seems 

intent upon accelerating this shift.11

The services should benchmark from civilian firms 

very carefully, however, as they differ from them in 

a critical way. The profession of arms is built upon 

trust. It relies upon an internal labor market, with little 

ability to poach executive talent to perform most core 

functions. After all, directing the measured and ethical application of deadly force is not something Dell or 

Pfizer does. This limits lateral entry into the military’s 

mid- or senior-officer positions. It also means that the 

military must pay far closer attention to its junior officers, the feedstock for its mid- and senior-level leadership. These unique workforce characteristics make 

the need for a modern, flexible compensation man-
9

agement system even more critical to the military’s 

Officer Corps than it is to the private sector.

Figure 1 highlights the four critical components of 

an officer talent-management model: new accessions, 

targeted retention, appropriate development, and 

effective employment of talent, all supported by an 

extremely granular evaluation system.12 These components are complementary rather than linear—they 

occur simultaneously and are of equal importance. 

In the Army’s case, they also apply across the three 

phases of a 30-year officer career—the initial junior 

grade or “apprenticeship” phase, the mid-career or 

full “practitioner” phase, and the late-career “senior 

leader” phase. 

Figure 1. The Officer Talent Management Model.

This model is shaped by several factors. As previously mentioned, the military by necessity has limited lateral entry into its mid- and senior-career ranks, 

Access - Develop - Retain - Employ

Limited Lateral Entry

Access

Limited Lateral Entry

Years

'Talent'

0 30

Career Phases 1 2 3 4

Retain

Develop

Employ

Retain

Develop

Employ

Retain

Develop

Employ

ADSO 10 20

Professional commanders,

executives and advisors

Objective

Junior Grade

“Learn the Profession”

Mid-Career

“Practice the Profession”

Senior Leaders

“Lead the Profession”
10

which makes retention more critical, particularly 

among officers completing their initial Active Duty 

Service Obligation (ADSO). Additionally, as officers 

move into their mid- and senior-career phases, the 

bulk of the jobs awaiting them demand “enterprise 

leadership” talents, the nonoperational or “business 

side” of the Armed Forces. Policy; force management; 

budgeting; research and development; strategy and 

doctrine; acquisitions and procurement; foreign relations; domestic politics; accountability to Congress; 

joint, combined, and interagency coordination; public 

affairs and outreach; and a myriad number of other 

talents are needed to lead one of the nation’s most 

complex and critical organizations. 

Given these realities, a talent-driven officer career 

timeline must incorporate extremely comprehensive, 

“whole person” assessments, going well beyond 

each officer’s tactical or operational acumen (after 

all, it’s impossible to negotiate unique compensation 

contracts with officers if their unique talents remain 

hidden). As Figure 2 indicates, these “Individual Development and Employment Assessments” (IDEAs) 

are so critical to ensuring the optimal development 

and employment of each person that we recommend 

executing one at the beginning of each officer career 

phase (with additional “azimuth check” assessments 

at 15, 24, and 27 years of service [YoS] to determine 

whether an officer’s particular talents remain relevant 

to constantly evolving service demands). 
11

Figure 2. A Talent-driven Army Officer 

Career Timeline.

For example, each of the commissioning sources 

(whether the service academies, reserve officer training corps [ROTC], or officer candidate school [OCS]) 

provides a powerful IDEA opportunity. For 3 to 47 

months, future officers are immersed in rigorous 

training and educational environments that can reveal 

extremely granular talent information, provided the 

right assessment tools are employed. This information 

can be used to match each individual with his or her 

optimal occupational specialty, but even more importantly, it establishes a cognitive and noncognitive talent baseline for each officer entering the service.13

Army officers currently spend their apprenticeship years (O-1 to O-3) being “on-boarded” into the 

profession via tactical and operational assignments, a 

solid practice that we recommend continuing. Before 

entering mid-career as O-4s, however, officers pass 

through two gates on an industrial-era personnel assembly line: an O-4 promotion board and a resident 

Years of Service 0 2 4 6 8 11 18 20

Junior Officers

Learn the Profession

Mid-Career Officers

Practice the Profession

Senior Leaders

Lead the Profession

PME 2

ILE

(CGSS)

PME 3

War 

College

(SSC)

O-1/O-2 O-3 O-4 O-5 O-6 to O-10

From apprentice

to practitioner

Professional Commanders, 

Executives, and Advisors

Developed to create 

senior officer talent pools

30+

PME 1

USMA

ROTC

OCS

-4

Cadet

IDEA 

1

Education

and

Training

Talent

Based

Branching

IDEA

2

Assigned

Career

Manager

IDEA

3

Add

Senior

Career

Manager

Grad School

Training w/ Industry

Managed by

Mid-Level Talent Pool

Managed by

Senior-Level Talent Pool

Any Sr. Ldr could be Assigned

to any Position/Rank at any Time

1 3 5 7 9 10

Managed Centrally

by Year Group

15 24 27
12

Command and General Staff School (CGSS) board. 

Both are convened at Department of the Army-level 

by well-intentioned people with very little talent 

information. Relying upon generic and inflated efficiency reports, their unenviable duty is to evaluate the 

career potential of hundreds of young officers whom 

they have never met. 

CGSS is a 44-week, intermediate officer educational 

requirement administered by the Command and General Staff College (CGSC) at Fort Leavenworth, Kansas. It matriculates roughly 50 percent of all officers 

selected for promotion to O-4 (the remainder taking 

the course via satellite school/distance learning modules). Much like the commissioning sources, CGSS is 

an excellent time and place for IDEAs but these can 

only occur with accompanying adjustments to officer 

management policies. One adjustment would be to 

link O-4 promotion to CGSS completion (thus eliminating a promotion board). To do this, however, CGSS 

must first become a far more rigorous and intellectually demanding environment, one that “screens, vets 

and culls” all potential field grade officers, not just 

half of them. 

First, the CGSC must gain discretion over its staff 

school admissions from the Department of the Army.14

Unlike the challenge facing other graduate school 

admissions departments, these applicants are not 

strangers—their comprehensive military performance 

histories and corresponding talent inventories should 

inform any admissions decision. Before extending 

admissions offers to prospective students, however, 

the college should also consider previous academic 

performance and a demonstrated ability to perform at 

the graduate level (captured via transcripts, writing 

samples, Graduate Record Examinations [GRE], etc.). 
13

This is critical because CGSS graduates will be less 

concerned with tactical operations and increasingly 

involved in institutional/enterprise management as 

they enter the mid- and senior-officer ranks. 

What we are suggesting, then, is that all company 

grade officers desiring promotion to major would apply to CGSS. Some would opt out by not applying, 

and, as “screening” suggests, not all of those who 

apply would gain entry. The acceptance rate would 

be pegged to overarching mid-grade officer demand 

(likely in the 70-80 percent range). While those denied 

admission could be retained at the service’s discretion, the vast majority would be involuntarily separated (although, per our compensation redesign, with 

a very generous pension benefit, which we introduce 

later in this monograph). 

Once accepted to CGSS, officers would enter an extremely rigorous vetting environment. For 44 weeks, 

they would be put through their intellectual paces. Far 

from “taking a knee,” the school experience would 

challenge officers across the spectrum of field grade 

talent demands, with new evaluative mechanisms and 

performance management experts cataloguing levels 

of each. Those meeting baseline requirements for field 

grade service would be sorted into the appropriate talent pools at the end of the program, but to be clear, 

100 percent graduation rates would fall by the wayside. The rigors of the course would cull a further 20% 

- 30% of enrolled students (again, contingent upon 

force requirements). 

This new methodology better aligns officer talents 

against demands by leveraging economic principles 

proven to increase productivity and job satisfaction. It 

ends the practice of selecting people for promotion and 

then shunting half of them into nonresident course-
14

work, an onerous additional duty that simultaneously 

denies them the benefits of instructor, evaluator, and 

peer interaction. It eliminates a negative signal (“you 

are less worthy of human capital investment than your 

peers”) and replaces it with a meaningful credential: 

CGSS graduation. Because graduates will complete a 

rigorous course that screens, vets, and culls perhaps 

a third of their peers, the CGSS diploma will signal 

that they possess field grade talents truly in demand. 

This is why promotion to O-4 will be concurrent with 

graduation—no promotion board is necessary. 

There are additional benefits as well. For example, 

providing Leavenworth with admissions authority 

will increase its relevance and accountability for graduation outcomes. Because officer assignments from 

mid-career forward are increasingly nonoperational, 

a carefully redesigned CGSS curriculum will better 

prepare each graduating class to meet those demands. 

Last and most important, however, this talent-driven 

methodology will provide a 9-month, round-the-clock 

talent evaluation opportunity that ensures terrific assessment fidelity for each and every officer, certainly more accurate than the seconds spent on each by 

legacy promotion boards. This will allow officers to 

be sorted into the right talent pools at graduation 

and managed by their talent potential rather than 

by year group. This will continue for the rest of their 

careers, giving the services the flexibility to place the 

right officer in the right job, regardless of rank or time 

in service. 

Leveraging extremely rigorous professional military education to conduct deep individual assessments at commissioning and mid-career would repeat 

a final time at the senior service college level: all midcareer officers desiring promotion to O-6 would ap-
15

ply; not all would be accepted; the respective colleges 

would make the admissions decision; successful graduates would become O-6s, etc. This final, penetrating 

talent assessment would ensure that those entering 

the senior officer cohort were appropriately matched 

to the strategic, enterprise level management duties 

awaiting the vast majority of them. As with mid-career officers, the removal of year group management 

constraints would truly liberate talent, providing the 

services’ human resource professionals the assignment flexibility demanded by the speed of change 

in the information age. This flexibility, however, requires an equally modern and flexible compensation 

component. 

Total Compensation Redesign—Assumptions 

and Principles.

A modern employee compensation scheme must 

do several things: identify desired organizational outcomes; assess the degree to which workers are meeting those outcomes; and directly link compensation to 

both. Unfortunately, today’s military compensation is 

not linked to defined organizational outcomes; it rests 

upon an ineffectual evaluation system and does little 

to incentivize productivity. It also ties compensation 

more directly to time in service rather than manner of 

performance, quite out of step with the professional 

military ethic. 

Our total compensation redesign proposal will 

help redress these problems. It rests upon some important assumptions: that the military possesses sufficient ability to assess global threats and establish national security objectives in accordance with guidance 

from the U.S. Government; that the Government seeks 
16

the most efficient and effective expenditure of defense 

dollars; and, as already discussed, that a talent management approach must be integral to compensation 

redesign. Given these, as well as presidential guidance, 

relevant labor economic theories, and today’s modern 

data management capabilities, we have identified five 

redesign principles with which a talent-driven military compensation system must adhere. They provide 

a framework with which to identify and correct flaws 

in the current system:

1. Cost Effective: Enhances national security at the 

lowest cost to taxpayers without shortchanging service members.

2. Competitive and Equitable: Attracts and retains 

the right talent with tailored compensation.

3. Flexible: Supports the ability of the U.S. Armed 

Forces to adapt to change.

4. Performance Driven: Links individual performance to both service values and required outcomes.

5. Supportable and Executable: Easy to comprehend and relatively simple to implement—garners 

sufficient support from critical stakeholders.
17

Principle #1 ― Cost Effective

Our men and women will always be our greatest 

strength, and they deserve the best possible support we can provide. However, as leaders, we all 

must exercise good stewardship over the resources 

entrusted to the Department, including competitive 

pay and compensation consistent with a ready and 

modern force. 

General Martin Dempsey,

Chairman of the Joint Chiefs of Staff15

Basic Pay Table Redesign.

In a fiscally unconstrained environment, the Armed 

Forces could compete in the labor market at any wage 

level. Reality, however, requires the uniformed services’ compensation system to balance national defense 

against some very real resource constraints.16 While 

the DoD fields the most capable military in the world, 

it must remain an excellent steward of taxpayer funds, 

even during perilous national security conditions or 

armed conflict. Using active component officers as an 

example, however, it is clear that fiscal stewardship of 

payroll dollars can certainly be improved.

Consider Figure 3, which displays officer base pay 

increases over the course of a 30-year career, expressed 

as a percentage of base pay at the previous rank.17 The 

largest pay raise (36 percent) occurs upon promotion 

to O-3, the culmination of several generous raises during an officer’s initial ADSO. Meanwhile, pay increases over the next 5 to 6 years of non-obligated service 

are relatively small (5 percent each). 
18

Figure 3. Overpaying Junior Officers, 

Underpaying Mid-Career Officers: Pay Increases as 

a Percentage of Previous Base Pay (2014).

This is quite inefficient because junior officers 

serving their initial 4- to 5-year ADSO are in effect 

“repaying” the services for college tuition assistance 

and/or guaranteed employment and benefits upon 

graduation.18 During this time, their outside employment options are virtually nonexistent, due both to 

their contractual service obligation and relative lack 

of experience. As a result, steep wage increases at the 

very beginning of an officer’s career amounts to overpayment—the Armed Forces are paying someone to 

stay who has no option but to stay. Doing so expends 

hundreds of millions of payroll dollars annually that 

could be used more effectively later.19

For example, from their 5th to 9th years of service, 

most officers accumulate significant command experience, a highly valued private sector commodity. 

At this career point, most officers are in their mid- to 

late-20s, a prime age to enter the mid-executive ranks 

in private firms that are assiduously trying to poach 

them. In other words, officers have far higher military 

0%

5%

10%

15%

20%

25%

30%

35%

40%

O1 O1 O2 O3 O3 O3 O3 O3 O3 O4 O4 O4 O4 O4 O4 O5 O5 O5 O5 O5 O5 O5 O6 O6 O6 O6 O6 O6 O6 O6

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
19

service opportunity costs as senior O-3s than they will 

at any other point in a 30-year career. To prevent talent leakage, this is the time to significantly ramp up 

basic pay, but the dollars are not available because 

they were paid out far earlier (and thus longer) than 

necessary. In short, the current compensation system 

fails to accurately gauge the market value of officer 

talent, thus overpaying new officers and underpaying 

more seasoned ones. 

This can be easily remedied. As Figure 4 demonstrates, we propose modest pay increases during the 

early years of obligated service: 5 percent at the end of 

years 1 and 2 and another 10 percent upon promotion 

to O-3. A 35 percent pay increase would follow at year 

5, when officers are more experienced, free of their 

ADSOs, and thus most vulnerable to talent poaching. 

Two more 10 percent pay raises would follow at years 

8 and 10.

From the 11th year of service onward, however, 

full talent management would replace year group 

management, thus eliminating time-in-service pay 

raises. While monthly base pay for O-4s and O-5s 

would remain constant (with the occasional cost of 

living adjustment), additional base pay increases 

would be linked to significant accomplishments. Further variations in pay would be driven by observed 

performance differentials, job degree of difficulty, 

and realization of desired outcomes—in other words, 

productivity pay. 
20

Figure 4. Monthly Base Pay Redesign for Company 

Grade Officers.

Two examples help illustrate the “basic-plusperformance” pay rates proposed in Figure 5. In 

the first, graduation from a mid-career staff college 

such as the Army’s CGSS near the 11th year of service would bring a very healthy 31 percent ($1,800) 

monthly basic pay increase. Variable performance 

pay could increase this amount by an average of $214 

(some officers would earn more, others less). In the 

second example, another generous base pay increase 

(33 percent or $2,500) would kick in near the 21st year 

of service after completion of a competitively selected 

senior service college program. At this career point, 

variable performance pay could increase an officer’s 

monthly income by an average of $304.20

5% Raise 5% Raise 10% Raise 35% Raise: 

End of ADSO 10% Raise 10% Raise + 

50% control 

of DC Funds

O-1 O-2 O-3

DC: 401K

$2,905 $3,050 $3,203 $3,523

$4,756 $4,756 $4,756

$5,232 $5,232

$5,755

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1 2 3 4 5 6 7 8 9 10

Base Pay
21

Figure 5. Proposed Officer Pay Redesign.

YoS Current Proposed % of Current

1 $ 2,905 $ 2,905 100%

2 $ 3,126 $ 3,050 98%

3 $ 3,812 $ 3,203 84%

4 $ 5,168 $ 3,523 68%

5 $ 5,168 $ 4,756 92%

6 $ 5,415 $ 4,756 88%

7 $ 5,415 $ 4,756 88%

8 $ 5,687 $ 5,232 92%

9 $ 5,687 $ 5,232 92%

10 $ 6,593 $ 5,755 87%

11 $ 6,593 $ 7,770 118%

12 $ 6,921 $ 7,770 112%

13 $ 6,921 $ 7,770 112%

14 $ 7,150 $ 7,770 109%

15 $ 7,150 $ 7,770 109%

16 $ 7,974 $ 7,770 97%

17 $ 7,974 $ 7,770 97%

18 $ 8,199 $ 7,770 95%

19 $ 8,199 $ 7,770 95%

20 $ 8,422 $ 7,770 92%

21 $ 8,422 $ 10,360 123%

22 $ 8,676 $ 10,360 119%

23 $ 9,878 $ 10,360 105%

24 $ 10,135 $ 10,360 102%

25 $ 10,135 $ 10,360 102%

26 $ 10,632 $ 10,360 97%

27 $ 10,632 $ 10,360 97%

28 $ 10,632 $ 10,360 97%

29 $ 10,844 $ 10,360 96%

30 $ 10,844 $ 10,360 96%
22

To be clear, this redistribution (versus wholesale 

cutting) of salary results in a small reduction in total 

officer base pay during the first one-third of a typical 

career. As the chart shows, however, by mid-career,

base pay recovers to 118 percent of the current rate, 

placing field grade officers solidly in the upper quartile of American earners, a highly competitive salary. 

This is prior to the inclusion of any tax-free special 

pays or allowances, as well as the various other types 

of nonmonetary compensation, which officers value. 

In short, any concerns regarding the ability of the proposed pay changes to meet officers’ financial needs 

are unfounded. 

A larger question, however, is whether grandfathered implementation of these basic pay adjustments 

would still attract and retain appropriately talented 

officers for the Armed Forces. To explore this, consider 

Figure 6, which illustrates the negative impact of current Army officer management practices, using scholastic assessment test (SAT) scores as a talent proxy. 

The SAT is useful in this regard because it measures 

high-demand information age officer talents (problem solving, communications, comprehension and 

analytical ability, mathematical intelligence, etc.).
23

Figure 6. Separating Equilibrium (with Army 

Officer SAT Scores as Talent Proxy).

As Figure 6 indicates, today all officers earn fixed 

wage W2, regardless of talent level (SAT score), in 

large part because the services lack mechanisms to 

accurately identify or measure talents. Savvy private 

sector competitors, meanwhile, make a much greater 

effort to find, differentiate, and employ high-demand 

talents, adjusting individual wage contracts as required. In this example, they offer W1 to individuals 

falling below a critical talent threshold (1,000 SAT) and 

W3 to employees who are above the critical threshold 

(SAT above 1,020). 

Theoretically, these differing wage contract approaches should induce a sorting effect. Individuals 

possessing critical talents (SAT of 1,020) would choose 

the private sector employer offering wages at W3, 

while those below this talent threshold would reject 
24

the private sector’s W1 wages in favor of the Army’s 

W2 offer. Actual data bear out the theory—this is exactly what happens today. The average SAT score of 

Army officers separating before their 8th year of service is indeed 20 points higher than those who remain 

in service.21 This suggests that increasing overall officer retention with targeted pay raises after an officer’s 

initial ADSO will slow information age talent flight, 

giving the military greater discretion over which officers it chooses to retain.22 In other words, the pay table 

redesign proposed in Figure 5 will better protect the 

services from talent poaching and low retention while 

saving money.23

Very importantly, however, mid-career officers 

would receive another significant compensatory benefit at year 10: 50 percent vesting in all Government 

401K contributions (baseline plus Government matching of personal contributions), with 100 percent vesting at year 15. This 401K is part of a newly proposed 

pension system (the 10-15-55 plan), part of our total 

compensation redesign.

Pension and Retirement Redesign—The MCRMC Report 

versus the 10-15-55 Plan. 

While speaking to troops at Fort Drum, New York, 

Secretary of Defense Ashton Carter recently said that:

. . . I’m looking very hard right now at blended retirement plans that would be similar to the 401(k) mechanism that is widespread in civil society. Because 80 

percent of our troops leave service before 20 years [of 

service] are up. . . . And in the current system, if they 

leave before 20 years, they leave with nothing.24
25

He is right. Military pensions are one of the few 

remaining defined benefit programs in the United 

States today. In the case of officers, the current 20-year 

cliff-vested pension plan was enacted in the Officer 

Personnel Act of 1947 and retained by the Defense Officer Personnel Management Act of 1980. It provided 

a way to off-board officers to maintain flow rates in 

an “up or out” promotion system. In other words, 

today’s pension plan is tied directly to the industrial 

era personnel system of which it is a part. As the services transition from personnel management to talent management, the existing pension system should 

also be re-evaluated as part of a larger compensation 

overhaul.

That re-evaluation has been ongoing, with no final 

decisions yet taken. For example, in 2011 the Defense 

Business Board (DBB) presented a report to the DoD, 

citing a fiscal imperative to reduce pension costs. Because the suggestions in the report focused largely 

upon cost cutting, it was met with hostility by several 

veterans’ advocacy groups, members of Congress, and 

the wider military community, which viewed the proposals as breaking faith with service members and potentially damaging to the continued recruitment and 

retention of talented people. In the wake of the DBB 

report, the 2013 National Defense Authorization Act 

(NDAA) directed the establishment of an MCRMC 

to provide the President and Congress with specific 

recommendations to “modernize” uniformed services 

pay and benefits. The MCRMC report (February 2015) 

is now dominating the compensation debate. 

During its initial deliberations, the MCRMC consulted with Army economists and manpower analysts 

who had published a comprehensive pension and 

retirement redesign proposal known as the 10-15-55 

plan.25 While the Commission’s final report echoes a 
26

key aspect of the Army plan—creating a hybrid defined 

contribution and defined benefit pension system—it is 

markedly different in detail. For example, the Commission’s pension and retirement plan calls for vesting 

in matching government 401K contributions after just 

2 years of service, while all Active Duty service members are still subject to a contractual service obligation. 

This is likely to flatten retention, with high opportunity-cost service members viewing the cash as a separation incentive. Unnecessary retention continuation 

pays are another feature of the MCRMC pension plan 

and a further departure from the 10-15-55 proposal. 

There are other differences as well, resulting in very 

different total program costs.26

Much like today’s basic pay tables, the MCRMC 

pension proposal falls short in the timing, amount, 

and application of benefits. As written, it is antithetical 

to effective and efficient compensation management. 

The 10-15-55 plan, however, is a viable alternative to 

the MCRMC recommendations. As Figure 7 shows, it 

calls for the services to begin contributing 5 percent 

of an officer’s pay to a 401K upon commissioning. 

Officers could then contribute up to an additional 5 

percent pay with a dollar-for-dollar match from the 

military. While officers would own their personal 

contributions, they would have to serve through 10 

years to vest in 50 percent of the matching military 

contributions. 
27

Figure 7. The 10-15-55 Pension Plan Aligned with 

Talent-Driven Career Timeline.

For each of the next 5 years, officers would vest in 

an additional 10 percent of those matching contributions until vesting in the full 401K value at 15 years. 

From there forward, officers would receive the full 

amount of both their personal and military contributions (plus interest) and could begin drawing on the 

401K at age 59 1/2. In addition to the 401K component, officers serving to 20 years would be eligible for 

the same defined benefit pension program of today 

but would not begin receiving payments until age 55. 

This delay creates three powerful benefits. First, it 

more than offsets the costs of the 401K payouts provided to officers separating between 10 and 20 years of 

service (in fact, the Army alone would save over $2B 

per annual commissioned cohort when compared to 

the current pension system). Second, it no longer enYOS 0 2 4 6 8 11 18 20

Junior Officers

Learn the Profession

Mid-Career Officers

Practice the Profession

Senior Leaders

Lead the Profession

O-1/O-2 O-3 O-4 O-5 O-6 to O-10

From apprentice

to practitioner

Professional Commanders, 

Executives, and Advisors

Developed to create 

senior officer talent pools

30+

Cadet

Age 23 33 55

10 15

Defined Contribution (DC - 401k): 5% Army, 5% own -> 5% Army match, withdraw at age 59.5

32

No Opportunity Cost penalty 

for serving past 20 YOS

DB 

Vests

Army DC

60% 70% 80% 100% of own DC 90%

Contributions

Defined Benefit (DB - Pension): same as current pension, but cannot withdraw until age 55

Grad School

Training w/ Industry

Managed by

Mid-Level Talent Pool

Managed by

Senior-Level Talent Pool

Any senior officer could be

selected for any job at any time

50%

100%

28 38

Managed Centrally

by Year Group

43 48

PME 2

ILE

(CGSS)

PME 3

War 

College

(SSC)

PME 1

USMA

ROTC

OCS

IDEA

1

Education

and

Training

Talent

Based

Branching

IDEA

2

Assigned

Career

Manager

IDEA

3

Add

Senior

Career

Manager

24 27
28

courages officers to retire at 20 years to “avoid working for less than half pay” when retirement eligible.27

Third (and as we mentioned earlier), recent studies 

indicate that skilled worker productivity continues to 

rise into the mid-50s. The military services would retain this productivity instead of watching it migrate to 

the private sector.

There are several other benefits associated with 

the 10-15-55 proposal. It aligns tightly with the talent 

management paradigm proposed in this monograph, 

targeting retention incentives where officer attrition 

is historically highest. The 401K component provides 

retirement benefits to officers not selected for staff or 

senior service college or to mid-career officers involuntarily separated from service. In short, it provides 

retirement benefits to a significantly greater share of 

officers than the current program, rewarding those 

who serve extended careers in uniform. While the 10-

15-55 proposal represents a 27 percent cut in 20-year 

retirement benefits compared to the current system, 

it actually offers greater potential benefit to 30-year 

retirees and substantially reduces financial risk for all

service members by ensuring each leaves the military 

with some pension benefit (compared to the mere 17 

percent who receive pension benefits today). 

Taken together, these basic pay and pension redesign components will create a far more cost-effective 

total compensation system than the one currently in 

place. They will enhance retention, reward productivity and performance, provide pension benefits to officers separating before retirement (all at lower cost to 

the taxpayer), and can easily compete with the very 

best private sector compensation plans.
29

Principle #2 ― Competitive and Equitable

. . . fairness and the market are two completely different things. Fairness is paying everyone the same. . . . 

The market is all about matching [talent] supply and 

demand and trying to tailor compensation to get and 

retain the best people you can. . .

― Professor Matthew Bidwell, 

 The Wharton School28

A sound compensation system closely considers 

labor market trends. It then attracts the right talent 

by providing competitive and equitable pay, benefits, 

and the other rewards from which employees derive 

“utility”—the satisfaction of their unique needs and 

desires. As Figure 8 suggests, an officer’s utility derives from a combination of tangible compensation 

and intrinsic rewards, each informed by the special 

nature of military service.

Figure 8. Components of a Total 

Compensation System.

0

Officer 

Utility

•Duty Position

•Unit Affiliation

•PMOS

Utility from 

Tangible Compensation

Utility due to 

Intrinsic Rewards

Utility Due to 

Intrinsic 

Rewards
30

The word “equitable” is a conscious choice on 

our part. By equitable, we do not mean “identical,” 

but rather “just” compensation, tailored to each officer’s duties, responsibilities, desires, credentials, 

and performance.29 The targeted, personalized pay 

and benefits we are suggesting are possible because 

a heterogeneous workforce has heterogeneous talents 

(which, in turn, shape preferences). This talent diversity causes each individual to place different value 

upon particular rewards, pushing universally applied 

notions of “fairness” somewhat into the background. 

For example, an officer who values a chance to attend 

graduate school more than receiving the duty posting 

of his or her choice will not feel it “unfair” if a colleague receives that benefit, and vice versa. In other 

words, if “fairness” equals identical compensation (as 

it does in the current pay table system), then it is hard 

to be fair when individuals with different talents derive utility from different things. 

At the moment, all officers of the same rank and 

year receive identical basic pay and allowances (conditional upon duty location). In the name of both 

“fairness” and administrative ease, this single wage 

contract system also provides officers similar access 

to most nonmonetary benefits despite widely varying 

performance, responsibilities, talents, and replacement costs. In effect, some officers are being overpaid 

and others underpaid—and they know it. 

This generic treatment occurs because today’s personnel management system neither knows nor sufficiently values the unique attributes of each officer. 

The coming talent management approach, however, 

will compile comprehensive, accurate, granular, and 

timely assessment information for every individual. 

This data will provide an upper boundary for total 
31

compensation negotiations, giving the services a more 

accurate valuation of each officer while allowing them 

to better satisfy each officer’s desires. 

As Figure 9 indicates, performance pay, education, 

assignment considerations, and training are all compensation “levers” that the military can manipulate to 

increase service utility to each officer, creating a more 

equitable total compensation package that goes well 

beyond direct pay and pension benefits (and, in many 

cases, require no additional outlay of dollars by the 

Government).30 These methods are simple and involve 

little administrative overhead. Additionally, tailoring 

these benefits to each officer can create substantial talent and compensation management efficiencies.31

Figure 9. Total Officer Compensation “Levers.”

Some initial efforts in this direction have already 

been made, and with good results. An example is 

the Army’s “post of choice” or “PADSO” program, 

Monetary Compensation Non - Monetary Compensation

• Incentive / Special Pays: Aviation, 

Hazardous Duty, Submarine Duty, 

Sea Pay, Family Separation 

Allowance

• Location Pay: Basic Allowance for 

Housing, Cost of Living Allowance

• Performance Incentives

• Leave and Pass Policies

• Retirement Savings: TSP and SDP

• Tuition Assistance / Loan Repayment

• Resident Civilian Graduate 

Education Opportunities

• Professional Certifications

• Training with Industry

• Assignment Considerations: Duty 

Location, Unit Choice, Position

• Service Specific: Professional 

Military Education, Skills Training

Non-Monetary Compensation

Resident Civilian Graduate 

Educational Opportunities
32

which grants newly commissioned lieutenants their 

preferred initial assignment location in exchange for 

3 additional years of obligated active service. Not all 

officers value this nonmonetary benefit, but for those 

who do, PADSO provides the Army with a powerful 

yet costless compensation lever that creates a more 

satisfied and trusting employee while harvesting 

additional man-years of service. 

Figure 10 illustrates the way in which this approach fundamentally changes officer wage negotiations. In the legacy system, tangible compensation 

limited to base pay and allowances simply may not 

match the opportunities a particular officer foregoes 

by remaining in the service. In the system we are proposing, however, the addition of preferred duty location, graduate school, or other nonmonetary incentives sufficiently increases the utility of the officer’s 

total compensation, exceeding that of his or her best 

outside option without increasing salary.

Figure 10. Negotiating Total Officer Compensation.

Officer

Utility

Legacy Wage

Contracts

Proposed Wage

Contracts

Non-Monetary

Compensation

(fixed for all)

Monetary

Compensation

Monetary

Compensation

Replacement Costs

Opportunity Costs

Non-Monetary

Compensation

(variable)
33

The DoD can reinforce the productivity-enhancing 

effects of tailored total compensation by offering targeted performance pays to mid-career officers.32 These 

could be used to reward individuals for outstanding 

performance (i.e., productivity) in certain critical assignments, to counter labor market competition for 

certain high demand, low density talents (fixed wing 

aviators, for example), or in lieu of nonmonetary 

compensation. 

To demonstrate the feasibility of this concept, consider the sample pay structure at Figure 11, where 

performance pay is layered upon a stable mid-career 

officer base pay rate (with occasional cost of living 

adjustments as required). Unhitching mid-career pay 

hikes from time-in-service creates a healthy payroll 

fund from which to disburse targeted performance 

pays. In the Army alone, for example, it would free 

up approximately $3.8 million per month for targeted 

performance pay.33

Figure 11. Total Officer Compensation—

Base Pay and Allowances Combined with

Performance Pay and Nonmonetary Benefits.

As illustrated in Figure 5, successful CGSS graduates would actually receive a higher base salary from 

11-15 years of service than they do now, keeping them 

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Company Grade Field Grade Senior Officer

YOS

Monetary

Per. Pay

High Attrition

Education

Certifications

TWI

Assignment

Skill Training

Sabbatical

DC: 50%

DB: Pension

DC: 100%

Education

Certifications

TWI Assignment

Skill Training

Sabbatical

Performance Pay

Monetary

Performance Pay

Monetary
34

solidly in the middle-class income quintile that society demands for selfless public servants in a high-risk 

profession.34 Layered upon that benefit would be a 

defined contribution plan with matching government 

contributions, with full vesting taking place by the 

15th year of service. Layered on top of that, officers 

could receive several of the nonmonetary benefits 

described in Figure 9. 

The Army, for example, has been able to negotiate officer tuition rates at some of the country’s most 

prestigious graduate schools for a fraction of what the 

public pays. If it communicates the value of this benefit to an officer (on average an additional $400,000 in 

lifetime earnings for the officer, at a government cost 

of just $10,000-$15,000), it can easily outcompete the 

private sector employer trying to poach officers with a 

$10,000-$20,000 a year pay raise.35 Rather than paying 

a retention bonus to keep an officer (100 percent economic rent), a graduate school investment increases 

officer productivity, entails an additional service obligation, and thus is “paid for” by the officer, all while 

providing a productivity return on the Government’s 

small upfront investment.

The final piece of the layered compensation illustrated by Figure 11 is the performance pay described 

earlier. Performance pay is targeted, not evenly distributed among all employees—if it was, it would not 

be performance pay. Pentagon decisionmakers must 

devise precise methods of application, but as an example, if 20 percent of all mid-career officer jobs were 

deemed extremely difficult and/or critical to national 

defense, officers matched against those jobs (and who 

delivered desired organizational outcomes) would 

receive an annual performance pay bump of up to 

$6,434, a handsome 7 percent pay increase. 
35

Again, this is just an illustrative example. Care 

must be exercised when implementing any performance pay system because monetary compensation 

influences extrinsically and intrinsically motivated 

tasks differently. Performance pay has a “price effect” 

on extrinsically motivated tasks: the more the person 

is paid, the more effort the person exerts. Conversely, 

however, performance pay may cause a “crowdingout effect” on intrinsically motivated tasks: the additional wages cheapen the utility gained from performing these tasks, leading to lower productivity.36

This is why we continuously emphasize “monetizing” 

the intrinsic rewards officers already value and from 

which they derive utility: duty type, location, etc.37 The 

larger point, however, is that performance pays can 

be used without increasing overall payroll costs and 

provide the services with greater flexibility to counter 

dynamic shifts in labor market conditions. 

37

Principle #3 ― Flexible

More flexible compensation systems can improve 

government’s ability to attract, recruit, and retain employees with high-demand skills. . . . Compensation 

systems that base salaries on post [i.e., position] rather 

than on skills and increase all salaries at the same time 

may not be in a position to facilitate that flexibility.

 Rolf Alter, Organization of 

 Economic Cooperation and Development38

Constantly evolving threats, technological change, 

and labor market competition demand that the U.S. 

military maintains and values both organizational 

and functional flexibility. Such flexibility is a product 

of many factors. A critical one is the ability to make 

dynamic workforce adjustments in response to any 

situation. This is exceedingly hard to do with an inflexible, static compensation system.

A case in point—recent fiscal pressures in the United States resulted in sequestration, requiring the military (particularly the Army and the Marines) to significantly cut the number of people in uniform. Less than 

a decade before, the global war on terror required just 

the opposite—a rapid expansion of the Armed Forces. 

Russia’s recent military muscle flexing and increasing military expenditures are now causing the United 

States to reconsider its Landpower downsizing, and 

a future rapid Army/Marine Corps expansion is entirely possible. These expansions and contractions 

have been the central challenge to military workforce 

management since the United States transitioned to an 

All-Volunteer Force in the mid-1970s and are likely to 

remain so for the foreseeable future. Unfortunately, 

the current compensation system is tied to an indus-
38

trial labor management model that focuses the Armed 

Forces not upon “talent” when rapidly expanding or 

contracting, but on “quantity.” 

Consider military officers recently subjected to 

involuntary separation boards (by year group). The 

current personnel and compensation management 

systems provided no useful way for board members 

to discern which officers might best meet current 

and future workforce talent demands. With no way 

to “see” talent due to extremely generic and inflated 

evaluation systems, the boards focused not upon talent but instead upon derogatory information (often in 

the farthest reaches of a personnel file, e.g., a driving 

under the influence [DUI] as an O-1) to justify an officer’s separation, despite years of exemplary service.

We are not for a moment downplaying the seriousness of something like a DUI, but if it was not cause 

for immediate separation at the time it occurred, then 

the officer was told in effect that “your performance 

from here out is what matters.” In many documented 

cases, however, it was not. It is hard to know how 

many talented network security experts, Russian linguists, Middle Eastern political scientists, or mechanical engineers were culled in this way. Under the compensation system redesign we are proposing, targeted 

performance pays would have helped focus boards 

upon those officers who were actually achieving desired organizational outcomes, not those guilty of a 

quite troubling yet one-time lapse in judgment. 

In addition to expanding or contracting existing organizations and functions as demanded by the 

times, the military must also redesign, consolidate, or 

eliminate legacy organizations, something it is notoriously slow to do (the Army eliminated its horse cavalry in 1950, the Navy struck its last battleship in 2006). 

A modern compensation system enables dynamic 
39

change. As new technologies allow the military to 

“do more with less,” the nature of work will change—

fewer pilots, turret gunners, and tank crewmen; more 

remote or autonomous combat systems, etc. 

Navy Secretary Ray Mabus recently said that the 

F-35 Joint Strike Fighter “. . . should be, and almost 

certainly will be, the last manned strike fighter aircraft 

the Department of the Navy will ever buy or fly.”39 As 

a result, the military will not only need fewer people, 

but people with different work talents. A flexible compensation system would allow pilots and commanders to transition from “operators” to “technical experts,” enjoying long careers not truncated by rapidly 

vanishing opportunities to lead a charge, engage in a 

dogfight, sink enemy ships, or lead ever larger organizations for ever shorter periods of time. 

Consider the recent creation of the Army’s Cyber 

Command and Cyber branches. Building a bench of 

officers capable of defeating cyber threats demands 

specific talents currently in low Army supply but in 

high demand across the country. A flexible compensation system would provide the Army with the ability 

to access, retain, develop, and employ the uniquely 

talented people critical to this mission with competitive incentive or performance pay. Currently, however, there is no provision for cyber “incentive pay,” and 

it may be slow in coming due to the nonmarket driven 

inflexibility of the current pay system. Meanwhile, 

some Army officers are receiving incentive pay, but 

unfortunately it is based upon perceived labor market competition identified in 1974. Army aviators are 

still “paid to stay,” even though today there is no real 

demand for their piloting skills in the private sector. 

Regardless, 41 years of Aviation Career Incentive Pay 

(ACIP) has eradicated its incentive value. It is now 
40

viewed as an entitlement, and, under the current pay 

system, it is very unlikely to change.40

With the compensation redesign proposals we 

have presented in this monograph, however, the services would gain all manner of flexibility. They could 

rapidly off-board personnel whose talents were no 

longer in demand, while rewarding their service with 

a generous, portable pension benefit. They could layer 

nonmonetary benefits on top of salary to tailor wage 

contracts to each individual, especially those wellsuited to transition from legacy work to new duties. 

Finally, they could quickly adjust performance and 

incentive pays in response to prevailing demands and 

labor market conditions. 

This last point is particularly important. Labor 

markets matter. In times when a specific talent is 

scarce, the military must tailor compensation contracts to increase the pay or program rewards associated with the talent. If the Armed Forces find themselves with an abundance of officers with low demand 

skills, wage contracts should reflect this, particularly 

in austere times. The rich performance data gained 

by linking talent and compensation management will 

ensure officers are paid to perform instead of merely 

paid to age. 
41

Principle #4 ― Performance Driven

[Young officers are] paying attention to the talent management revolution going on around us. Inspired by 

the thoroughly American creed of opportunity, equality, and freedom to pursue individual gifts—they 

watch their corporate peers rising past others based on 

merit, not merely when they joined the firm. Or they 

see opportunities to master a profession without worrying about an ‘up or out’ system which assumes everyone must be groomed for the highest possible rank. 

They wonder why they can’t do the same, in service to 

their country.

 Vice Admiral J. Kevin Moran, 

 Chief of Naval Personnel41

In the United States, many Federal, state, and local government agencies have experimented with 

performance pay to improve performance outcomes. 

While some have been successful, many others have 

not. A common problem underlies most failures—an 

obvious disconnect between talent assessments and 

compensation.42 In fact, a robust body of labor and 

organizational research suggests that closely tailoring wage contracts to individual talents is the single 

best way for organizations to increase both individual 

and organizational performance. Figure 12 illustrates 

this linkage. 
42

Figure 12. A Performance-Driven 

Compensation Cycle.

The key to achieving this, however, is a talent management system. Because today’s military has not yet 

completed its transition from industrial era personnel 

management to information age talent management, 

its current compensation system cannot maximize 

productivity—it lacks accurate, granular talent assessments. This breaks the link between performance 

outcomes and compensation that is so critical to effective and efficient organizations. Consider that at any 

given moment (among those of the same rank and service), some officers today are achieving requisite performance outcomes, some are vastly exceeding them, 

and some are falling short, yet each is being paid identically. This rewards the underachiever, encourages 

status quo effort, and can lower the productivity of 

those previously exceeding performance expectations. 

In other words, the current compensation system 

lowers average productivity. 

Office of Economic & Manpower Analysis - FOUO 3

An Effective Compensation Process

Performance 

Outcome

Compensation Assessment
43

Figure 13 models these performance effects in 

terms of a generic performance metric (P) in the current 

wage system. In this example, a single Army captain 

assigned to Fort Hood, Texas, receives her base salary 

and allowances (point A) for as long as she performs 

at a requisite threshold level (Pmin,O-3). She receives no 

additional compensation, however, even when realizing organizational outcomes that far outstrip those 

of her peers and even more senior officers (past point 

B).43 As she and others begin to notice this, it creates a 

disincentive to exceed the performance threshold associated with point A because today’s officer compensation contracts cannot respond dynamically.44 This 

is because the current personnel and compensation 

management systems neither continuously nor accurately assess officer talents. 

Figure 13. Performance and the Current Officer 

Wage Contract.

Performance

Metric, P

Average 

Annual 

Compensation

WO-3

WO-4

WO-5

Pmin,O-3 Pmin,O-4

A B
44

For comparison purposes, Figure 14 illustrates the 

potential productivity impacts of the variable compensation model we are suggesting. In the current system, the military might observe “pooling” around a 

requisite level of performance (point A), but in the officer talent management system the military is moving 

toward, the dynamic linkage between compensation 

and performance can incentivize desired behaviors.

Figure 14. Performance and the Variable 

Compensation Contract.

For example, an officer performing at P1 (exceeding requisite outcomes) could prompt an offer of fully 

funded resident graduate school. A duty assignment 

of choice could follow if he or she performed at P2. 

In other words, an approach aligning variable compensation with performance, buttressed by an understandable, defendable, and rational talent assessment 

system, would gradually increase organizational 

WO-3 + GS +Duty Choice

Performance

Metric, P

WO-3

Pmin,O-3 P1

WO-3 + Grad School

P2

Average 

Annual 

Compensation

Performance

Metric, P

WO-3

Pmin,O-3 P1

WO-3 + Grad School

P2

Average 

Annual 

Compensation

A
45

productivity via “sorting” and “incentive” effects.45

In other words, organizational productivity would 

rise as officers sought jobs aligned with their talents, 

simultaneously increasing their potential to earn 

performance pay.

As discussed previously, in the officer talent management system that the military is moving toward, 

the services will conduct extremely comprehensive 

assessments of each officer (the labor supply) at key 

intervals, identifying talents and talent gaps, and revealing whether desired outcomes are being realized. 

These assessments will yield the individually tailored 

wage contracts described here. Importantly, however, 

the military must also identify desired work outcomes 

and performance metrics for each of its officer positions 

(the labor demand). The more accurately the Armed 

Forces can align talents with demands, the more 

efficient each individual wage contract will be. 

47

Principle #5 ― Supportable and Executable

If you want to succeed, get some enemies.

 Thomas Edison46

Looking back, the universal adaptation of electricity seems inevitable. Not so from the vantage point 

of 1879. As Thomas Edison learned firsthand, implementing any paradigm-shifting innovation requires 

widespread support. Powerful, entrenched interest 

groups often combine to squash disruptive upstarts. 

So it was in Edison’s case. Private gas light utilities 

devoted substantial resources to blocking the launch 

of his electric service. Gas lighting was a mature, profitable, and well-established industry with robust infrastructure, franchises, and manufacturing facilities. 

The increasing quality, reliability, and availability 

of gas light had won society over. Gas light was the 

norm, a superior and convenient alternative to cooking 

fires, whale oil lamps, or paraffin. Its position seemed 

unassailable.

With no power infrastructure in place, Edison 

faced a tough, uphill slog—why invest in electric light 

when gas was already meeting the public’s light, heat, 

and cooking needs? What problem would electricity 

solve? Edison had to convince people that, while shifting to electricity would initially be hard, the return on 

investment would be well worth it. He emphasized 

electricity’s obvious advantages over gas light—lower 

cost, increased safety, the ability to power electric motors, and the relative ease with which it could reach 

still-dark rural America. As we know, Edison prevailed by presenting a compelling case for change, one 

sharpened in response to his opponents. He presented 
48

a comprehensive vision of electricity’s future. It could 

do everything gas could do and more for many more 

people and at far lower cost. Electricity opened the 

door to new possibilities.

As the DoD builds its case for talent-based workforce and compensation management transformations, Edison’s battle against the entrenched gas utilities is instructive. Yes, the current military personnel 

and compensation management systems work. Yes, 

they provide a functioning service. But talent management, much like electricity, can do much more and at 

lower cost. The customers (service men and women) 

seem convinced, the stockholders (taxpayers) would 

certainly welcome it, but the corporation (DoD) 

must still gain the support of its Board of Directors 

(Congress). As Congress considers personnel and 

compensation reform, the question before it is a simple one—“Do you prefer gas light or electric light?” 

The good news is that Congress has demanded a 

new way of doing business and is therefore receptive 

to change. How it responds to the DoD’s proposals, 

however, will be shaped by both public and service 

member sentiments. 

According to a Gallup Poll, 74 percent of Americans have a “great deal” or “quite a lot” of faith in the 

military, making it the country’s most trusted institution.47 That is not a blank check, however. In wartime, 

taxpayers grade the defense establishment on its ability to protect our shores, so it is little surprise that, 

after almost 15 years of warfare, the military garners 

high marks. In peacetime, however, the evaluative 

criteria shift—“Keep us safe, but do not spend $600 

on a toilet seat or a ball-peen hammer.” To preserve 

the public’s trust and support, particularly in austere 

times, the military must become increasingly effective 
49

and cost efficient. Talent management, accompanied 

by carefully crafted total compensation reform, will 

deliver this. It will reassure the public that the military 

is not just another bloated bureaucratic agency—it 

fights well, but it does an even better job of sufficiently 

compensating American sons and daughters without 

being inefficient or wasteful.

Service member perceptions of any new compensation management system are equally important. 

In the case of officers, compensation must attract the 

right individuals to the right jobs by adequately accounting for the internal and external valuation of 

the talents required to support the military mission. 

Furthermore, the compensation system must reinforce 

the link between individual performance and organizational goals. It must also take care not to subvert 

the professional military ethic or undermine trust, the 

lifeblood of the military profession. 

The officer compensation management redesign 

we are proposing is so different from today’s system 

that one might wonder whether it can actually gain 

support among all critical stakeholders. One way 

policymakers can soften implementation impact is 

via grandfathering, giving already serving men and 

women the option to stay with the old system or 

move to the new. Another way to garner support is 

to demonstrate the new system’s competitiveness in 

the American labor market. A third is to make clear 

that the vast majority of service people will gain a portable pension benefit. A fourth is to emphasize that 

officers will more or less remain in the same middle 

class income quintiles they occupy today. A fifth is to 

enumerate total cost savings to the Government. 
50

Perhaps the best way to assuage concerns over a 

seemingly foreign compensation system, however, is 

by pointing out that it is not that foreign after all. In 

fact, much of what we prescribe is consistent with the 

DoD’s current approach to enlisted pay. For example, 

the military often retains select noncommissioned 

officers (NCOs, E-6, and E-7) for additional service, 

even though they have not advanced to the next rank 

per typical career timelines. The enlisted compensation and career management systems do not prevent 

this—“up or out” is not gospel in their world. Additionally, the military uses a broad mix of nonmonetary 

and monetary compensation to retain NCOs with specific talents, a practice that officer talent management 

will emulate. 

While on the subject of enlisted pay practices, another possible objection to the officer compensation 

redesign we are proposing is that it will create friction 

between officers and NCOs due to changed earnings 

differentials. Figure 15 lays such concerns to rest. As it 

illustrates, rifle platoon leaders today are typically in 

their 1st to 3rd year of service. Their platoon sergeant, 

meanwhile, likely has 10 or more years of service 

under his belt. Under the current system, the NCO’s 

experience commands a wage premium—he outearns 

his commissioned counterpart. As shown, that would 

still be the case in our proposed pay table redesign. 

In fact, the general trend of officers making less or a 

comparable amount to their enlisted counterparts as 

junior officers but more as mid-career officers holds 

quite nicely in our proposal. 
51

Figure 15. Legacy of Proposed Officer Pay

 Versus Enlisted Pay.

The same is true of officer versus warrant officer 

base pay. As Figure 16 shows, commissioned and 

warrant base pays today closely correlate through 

3 years of service. In our proposed officer basic pay 

table restructuring, warrant pay would actually outstrip commissioned pay until 6 years of service, where 

the current pay differential between them would resume. There is nothing to indicate that this would 

negatively impact cohesion between the two officer 

cohorts.

Officer PSN EM PSN

Platoon O2 - 2 years E7 - 14 years

Company O3 - 6 years E8 - 20 years

Battalion Staff O4 - 12 years E9 - 25 years

Battalion CMD O5 - 18 years E9 - 27 years

Brigade Command O6 - 24 years E9 - 29 years

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Platoon Company Battalion Staff Battalion CMD Brigade Command

Years of Service and Pay Levels Comparison

Enlisted Counterpart Pay Current Officer Pay Proposed Officer Pay
52

Figure 16. Legacy of Proposed Officer Pay 

Versus Warrant Officer Pay.

Even if certain stakeholders resist the total compensation redesign framework we propose, we believe a reasonable majority will support it as a vast improvement over the current system. Holdouts should 

eventually accept it as their “best bad choice” because 

no other proposal is as efficacious, while the status 

quo is fiscally unsustainable. To be clear, however, 

what we proposed here is an eminently good choice 

for the country and its service people. In fact, even 

if we were not operating in a time of fiscal austerity, 

we would still make these recommendations because 

they improve national security by helping usher in 

talent management.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1 2 3 4 5 6 7 8

Years of Service 

Warrant Pay Current Officer Pay Proposed Officer Pay
53

CONCLUSIONS 

The dogmas of the quiet past are inadequate to the 

stormy present. The occasion is piled high with difficulty, and we must rise with the occasion.

 Abraham Lincoln48

Abraham Lincoln understood that status quo 

thinking would not, could not, save the Union from 

disintegration. Early in the Civil War, he recognized 

that the contest would forever change the role of the 

Federal Government in American life. Defeating the 

Confederacy would require: a nationally planned 

and executed strategy; the transformation of the 

U.S. Armed Forces from a frontier constabulary and 

muddy water Navy into a formidable, modern combination of land and sea power; military leaders who 

could ruthlessly prosecute the strategy (Ulysses Grant 

and David Farragut); and continuity of that leadership until the South succumbed. 

We are not equating the need for compensation 

reform with the Civil War. Much like that conflict, 

however, the issue has profound national security 

implications and will encounter devoted, motivated 

opponents. Success requires a thoughtful strategy, the 

staunch support of both military and civilian leaders, 

and a stable leadership team within the DoD to develop and implement change over several years. The 

DoD will also need to transform its human resource 

management organizations and practices to successfully lead change, something that can and must be 

done.

Most of the nonmonetary compensation elements 

we highlighted are already granted at the discretion 

of the individual military services. Some have joint 
54

implications and require leadership at the DoD level, 

but the changes can be made somewhat easily once 

stakeholders understand the reasons and benefits of 

doing so. Other change components will take longer 

to implement, particularly the base pay restructuring, performance pays, and pension redesign we suggested. Eliminating the pertinent outdated laws found 

in the United States Code requires congressional and 

presidential approval, no mean feat given the level of 

legislative gridlock currently permeating government. 

Over the past several years, several proposed law 

changes aimed at adjusting Active Duty compensation 

elements have failed to transit the legislative process. 

If improperly communicated, any new change effort 

is likely to encounter the same fate, swamped by opponents even before they understand the benefits of 

the proposal.

The first step to avoiding this fate is to clarify to all 

why this proposal is being made. This time, compensation redesign is ancillary to the adoption of a new 

people management paradigm—talent management. 

Yes, it saves money, and, yes, it does so by eliminating 

overpayment (and underpayment) of benefits through 

better design and adherence to sound economic principles. Its purpose, however, is not to save money but 

to enhance national security; and to access, develop, 

employ, and retain a peerless body of officers who can 

lead the services to victory over any opponent. 

The second requirement is to do the necessary analytical spade work prior to implementation. The services must conduct a penetrating reassessment of their 

organizational goals (labor demand) and required 

performance outcomes in key jobs (labor supply). 

This analysis will lay the groundwork for building the 

layered, dynamic, and targeted pays described in this 
55

monograph, as well as for the professional military 

education curricula redesign truly needed to prepare 

officers for the “force of the future.” 

The timing may be right to incorporate this workforce analysis into the 12th Quadrennial Review of Military Compensation due in 2016.49 Upon its completion, 

the services can then pilot proposed changes with 

small segments of its officer workforce, refining and 

scaling changes to incorporate lessons learned. As it 

does so, a third and final non-negotiable for successful compensation redesign implementation is grandfathering. The military must stipulate that no serving member will ever endure a pay reduction during 

implementation. 

If carefully implemented, the total compensation 

management redesign proposed here, including the 

proposed pension system overhaul, will allow the 

military to increase average productivity by revealing and rewarding talents that are in demand, something the current system simply cannot do. It will also 

provide the payroll flexibility needed to ensure the 

Armed Forces can rapidly adjust to both emerging 

threats and labor market competition by thoughtfully 

managing talent. 

ENDNOTES

1. Remarks by Secretary of Defense Ashton Carter to Troops 

in Fort Drum, New York, March 30, 2015, available from www.

defense.gov/Transcripts/Transcript.aspx?TranscriptID=5606.

2. See www.history.army.mil/books/revwar/ss/revdoc.htm.

3. Today’s military compensation system reflects the slow 

evolution of the U.S. Armed Forces from a conscription model 

to a professional, All-Volunteer Force. Pay compression, limited 

lateral entry, health care, education benefits, defined-benefit pen-
56

sion, and other features of the current system were developed incrementally rather than holistically. 

4. The MCRMC was established by the National Defense Authorization Act (NDAA) for fiscal year (FY) 2013 to provide the 

President of the United States and the Congress specific recommendations to modernize pay and benefits of the uniformed services. For the MCRMC full report, see www.mcrmc.gov/public/docs/

report/MCRMC-FinalReport-29JAN15-HI.pdf. 

5. Ibid. p. 2.

6. One of the lessons learned from World War II was that officer management in the interwar years (particularly in the Army) 

stifled advancement and development. All officers were ranked 

by seniority on a single list, advancing only upon the death, resignation, or retirement of a more senior officer. On the eve of World 

War II, the War and Navy Departments therefore possessed a 

high percentage of very old senior officers unsuited for modern 

combat and a large number of middle-aged lieutenants and captains who had never commanded above the company level. To 

remedy this, the services adopted today’s “up or out” officer management system in 1947.

7. For a comprehensive literature review, see Jan C. van Ours 

and Lenny Stoelddraijer, Age, Wage and Productivity, Bonn, Germany: Institute for the Study of Labor (IZA), February 2010, available from http://ftp.iza.org/dp4765.pdf.

8. For an even more detailed discussion of the 10-15-55 plan, 

see Roy A. Wallace, David S. Lyle, and John Z. Smith, A Framework for Restructuring the Military Retirement System, Carlisle, PA: 

Strategic Studies Institute, U.S. Army War College, 2013. 

9. Peter F. Drucker, The Effective Executive, New York: Harper 

and Row, 1966, pp. 72-73.

10. For a thorough discussion of talent management in a military context, see Michael J. Colarusso and David S. Lyle, Senior 

Officer Talent Management: Fostering Institutional Adaptability, Carlisle, PA: Strategic Studies Institute, U.S. Army War College, 2014. 
57

11. Andrew Tilghman, “Carter: Toss Vintage Personnel 

Systems.” Military Times, April 12, 2015, available from www.

militarytimes.com/story/military/pentagon/2015/04/12/carter-socialmedia/25513773/. 

12. While a myriad number of administrative actions are part 

of workforce management (for example, transitioning fired or 

retired workers), these are transactional rather than transformational in nature—they do not shift the production possibilities of 

an organization outward. Culling workers who are a poor fit for 

the organization is integral to talent management as a subset of 

robust evaluations, but transitioning these workers out of the organization is not. It is a necessary business expense, but it is not a 

talent management function. This is not to say that transactional 

functions have no impact upon talent management—in this case, 

providing too generous a transition benefit could harm retention 

by encouraging high opportunity-cost workers to leave.

13. Talent-based branching has been in operation at the United States Military Academy (USMA) since the fall of 2012. Cadets 

receive feedback regarding their own talent strengths and weaknesses based on three different perspectives: 1) cognitive and 

noncognitive assessments, 2) supervising officer evaluations, and 

3) cadet file reviews. Cadets use this information to determine the 

branches in which they might be best suited to serve. Branching 

administrators use the cadet talent assessments and the talent requirements from the various branches to provide best-fit branch 

recommendations to cadets, based on the development of composite “branch scores” for each cadet. A final branching board validates branch assignments to ensure that the cadets’ talents meet 

the specific talent requirements of the Army’s basic branches. For 

a more detailed discussion of this process, see Sarah Heckel, David Lyle, and William Skimmyhorn, “Talent-Based Branching: 

Improving Occupation Matches in the U.S. Army” (forthcoming). 

14. This is already taking place in a military educational context—the service academies have discretion over the bulk of their 

admissions.

15. General Martin Dempsey, Chairman of the Joint Chiefs 

of Staff, remarks to the Senate Armed Services Committee, May 

6, 2014.
58

16. According to Army Chief of Staff Ray Odierno, 

The cost of a soldier has doubled since 2001; it’s going to 

almost double again by 2025. We can’t go on like this, so we 

have to come up with [new] compensation packages.

See Walter Pincus, “Personnel Costs are a Growing Threat to Defense, Military Leaders Tell Congress,” The Washington Post, November 13, 2013.

17. Source: Military Pay Tables, Washington, DC: Defense Finance and Accounting Services, January 1, 2014, which are used 

for all analysis pertaining to the current compensation system. 

18. ADSOs differ by commissioning source. For example, 

Service Academy graduates incur an initial 5-year ADSO upon 

graduation and commissioning, whereas ROTC scholars incur a 

4-year ADSO. 

19. These pay table adjustments will reduce annual Army officer payroll outlays by approximately $144.5 million. Savings calculations are for Active Duty, Army Competitive Category (ACC) 

officers only and are based upon the 2014 Defense Finance and 

Accounting Services military pay table. Properly aligning pay 

increases with an officer’s rising labor market value will also increase retention, bringing additional savings in officer recruiting 

and transition costs. 

20. Figure 5 represents one possible structure for the performance payments. It allocates a specific amount of available 

monthly performance pay. To determine the amounts represented in the table, we established mid-career and senior officer basic 

pay rates based upon income distribution rates found in the 2012 

American Community Survey. When doing so, we considered 

only employed American workers of similar age and educational 

background. We also omitted professional degree holders (doctors, lawyers, veterinarians) and entertainers (athletes, actors, 

etc.) and truncated the sample at $30,000 in annual income and 

above at $200,000. We then selected an average monthly performance pay amount that would move an officer to the next highest 

quintile in the income distribution. For example, the $214 average 

monthly incentive for O-4s and O-5s moves them from the 72nd 
59

to the 75th percentile of the distribution for annual income. The 

$304 average monthly incentive for O-6s moves them from the 

83rd to the 85th percentile. 

21. Source is the Total Army Personnel Data Base, USMA 

data, and U.S. Army Cadet Corps data for scholarship officers 

from year groups 2001-05.

22. The SAT is designed to measure the probability for academic achievement at the undergraduate level. A superior performer on the SAT likely possesses a particular talent distribution: 

problem solving, critical thinking, communication, etc. These talents are in high demand in the Officer Corps and are likely to 

remain so, making the SAT a good proxy for measuring desired 

officer talents. It is not the only measure of talent, nor are the talents it assesses the only ones sought by the Armed Forces in their 

officers.

23. The net impact of these changes is a savings of just under 

$30,500 per 30-year officer career, based on the proposed officer 

career timeline. This is the net present value (NPV) of pay differences between the current and proposed systems, discounted 

to today using a rate of 2.5 percent. Most of the savings in this 

model occur due to the reduced base pay for company grade officers. The total savings through the 10th year of service amount to 

$73,150 per officer (NPV). However, subsequent increases in field 

grade pay substantially reduce this amount.

24. Remarks by Secretary of Defense Ashton Carter to Troops 

in Fort Drum, New York. 

25. For a complete discussion of the 10-15-55 plan, see Wallace, Lyle, and Smith, A Framework for Restructuring the Military 

Retirement System. 

26. While the Commission’s blended defined benefit and defined contribution concept is sound, the specific elements of the 

proposal cannot produce the financial outcomes suggested in its 

report. For example, the Commission argues (p. 10) that its retirement redesign proposal “. . . reduces annual DoD budgetary 

costs and Federal outlays, in FY 2016 constant dollars, by $1.9 

billion and $4.7 billion, respectively, after full implementation.” 
60

Our analysis, however, indicates that costs will actually rise. We 

reached this conclusion by conducting a basic cohort analysis of 

the Army’s Active Duty enlisted and officer populations (a cohort 

is defined by the total number of officers or enlisted service members with the same service entry year). As a baseline, we projected 

the total retirement program costs for cohort members who retire 

at 20 Years of Service (YoS) under the current defined benefit (DB) 

system, approximately $850 million. Assuming the same cohort 

retention behavior through 20 YoS (a key assumption in RAND’s 

Dynamic Retention Model, which informs the MCRMC report), 

and applying the Commission’s blended Defined Contribution/

Defined Benefit/Continuation Pay plan, total retirement program 

costs would rise to $1.3 billion in 2015 dollars, an increase of more 

than half a billion dollars per cohort. Our analysis rests largely 

upon the same modeling assumptions used by the MCRMC. Key 

differences: for the enlisted cohort, we used a retirement age of 

42 (which actually lowered the MCRMC’s proposal costs). For 

both cohorts, we used average cohort sizes and separation-byYoS figures from 2006-10; assumed wage growth continues at 1 

percent annual growth rate, creating a negative real growth rate 

but reflecting current policy; used a government discount rate of 

4 percent to calculate NPV of programs to the Government (rather 

than the individual); and assumed all noncommissioned officers 

(NCOs) and officers remaining on Active Duty at 16 YoS received 

continuation pay multipliers per the respective examples found 

on pp. 33 and 34 of MCRMC report. Extrapolating from this analysis, the Commission’s retirement program proposal would likely 

cost the Government in excess of $1 billion more per cohort across 

all services than the current pension system.

27. In other words, officers could theoretically retire at 20 

years of service and immediately receive half of their salary as 

part of their pension in addition to working a job outside of the 

military that pays exactly the same (or more) as they would receive by remaining on Active Duty. By staying in, they forgo the 

50 percent pension payout, essentially reducing their compensation by half. 

28. “Balancing the Pay Scale: ‘Fair vs. Unfair’,” Knowedge@

Wharton, May 22, 2013, available from knowledge.wharton.upenn.

edu/article/balancing-the-pay-scale-fair-vs-unfair/.
61

29. For further discussion of the possible efficiencies from 

offering choice in selection of nonmonetary compensation packages, see Peter J. Coughlan, William R. Gates, and Noah Myung, 

“One Size Does Not Fit All: Personalized Compensation Incentives In Military Compensation,” Defense and Security Analysis, 

2014, pp. 1-19. 

30. These levers are currently administered using one of four 

criteria: 1) time in service; 2) binary—i.e., jump pay is a uniform 

lump sum paid to any service member on “jump status”; 3) universal access; or 4), a combination of 1 and 2.

31. The military must exercise caution when including other 

nonmonetary compensation programs in contract negotiations. 

Noticeably absent from our options list are several universal benefits: health care, childcare, recreational, commissary and Post/

Base Exchange access. The military should not tailor these benefits to individuals because it owns the infrastructure for each, 

indicating underlying economies of scale. In other words, if service members were permitted to “opt out” of these, a threshold 

level of participation might be crossed, below which provisioning 

costs would actually be higher than they are today with universal 

participation. Additionally, the military should never “monetize” 

benefits that increase utility through recognition or status, such 

as awards. This simply erodes the value of the award to the organization and the service member, reducing its utility and thus its 

appeal as part of any total compensation package. 

32. While the military could offer performance pay to O-3s, 

we caution against it at this early point in their career timeline. 

By offering monetary incentives in lieu of or in addition to graduate school, functional area transfer, or training with industry, the 

military risks giving money to officers for retention payoffs at the 

risk of undermining the long-term development of its talent pool. 

Instead, the military should leverage the many nonmonetary human capital development levers at its disposal to retain O-3 talents in demand.

33. Based upon a projection of 17,500 officers in the combined 

O-4 and O-5 ranks.
62

34. Source for national income distribution data is the 2012 

American Community Survey. 

35. Jennifer Cheeseman Day and Eric C. Newburger, The Big 

Payoff: Educational Attainment and Synthetic Estimates of Work-Life 

Earnings, Washington, DC, U.S. Department of the Census, July 

2002, p. 4.

36. See Weibel et al., “Pay for Performance in the Public Sector-Benefits and (Hidden) Costs,” Journal of Public Administration 

Research and Theory, Vol. 20, No. 2, 2010, pp. 387-412. 

37. To assess the viability of using performance pay to enhance performance for certain military tasks, the Army’s Combine Arms Center (CAC) and Office of Economic and Manpower 

Analysis (OEMA) will conduct a vignette study with officers enrolled in CGSS at Fort Leavenworth, Kansas. Careful implementation of the proposed compensation plan across the military will 

require similar piloting across grades and specialties to account 

for cultural and market differences. 

38. Organisation for Economic Cooperation and Development (OECD), Public Sector Compensation in Times of Austerity, 

Paris, France: OECD Publishing, 2012, p. 10, available from dx.doi.

org/10.1787/9789264177758-en.

39. Secretary of the Navy Ray Mabus, remarks presented at 

the 2015 Sea-Air-Space Symposium, April 15, 2015, available from 

navylive.dodlive.mil/2015/04/15/secnavs-prepared-remarks-at-sea-airspace-2015/.

40. ACIP is a prime example of how the services must tailor 

their performance and incentive pays. The Army contends that 

exposure to hazard is not the basis for this substantial pay differential, a position borne out by the fact that many aviators in a 

nonflight status receive it during their careers, and many Army 

officers perform equally hazardous and complex duties, yet receive no incentive pay. Congress required ACIP be tied to fluctuating private labor market demands for rotary wing pilots. Since 

its inception in 1974, however, ACIP has continued virtually unchanged, its pay rates tied more closely to the pilot incentive pays 

offered by the Navy and Air Force. The bulk of those pilots, how-
63

ever, are commissioned officers flying fixed wing jet aircraft. Multiple analyses indicate there is continuous and substantial labor 

market competition for jet pilots. There is no evidence, however, 

that substantial labor market competition exists for rotary wing 

aviators. While we are not arguing that ACIP be ended, we are 

suggesting that incentive pays should have a legitimate market 

basis and be adjusted, reallocated, or eliminated when no longer 

justified. If not, they eventually lose their incentive power and are 

instead perceived as an entitlement.

41. Available from thehill.com/blogs/congress-blog/homelandsecurity/213529-talent-and-national-security.

42. See Paula Ingraham. “Of Pigs in Pokes and Policy Diffusion: Another Look at Pay-for-Performance,” Public Administration Review, Vol. 53, No. 4, 1993, pp. 348-356.

43. Even the link between high performance and early promotion in the current personnel system provides lackluster compensation incentives. If the captain in our example was promoted 

below the zone to O-4, she would receive higher pay than her 

original cohort peers—for all of 9 months (in effect, a $5,786.10 

bonus). Meanwhile, her professional developmental timeline has 

just been truncated by a year, a tough tradeoff for so meager a 

benefit. For example, she may no longer have time to attend graduate school, foregoing a degree whose impact on lifetime earnings would dwarf her early promotion pay raise. In other words, 

she has been heavily penalized by the current system for over 

performing. 

44. To be clear, we acknowledge the unique nature of military service and the value of experience in assuming positions of 

greater responsibility. For example, even if the Army identified 

a captain who was, by any other measure, qualified to command 

a battalion, lack of experience as a battalion executive or operations officer would serve as strong justification for not assigning 

the officer to battalion command. For certain military positions, 

there is no substitute for experience. Performance in subordinate 

positions often indicates potential for success, but a responsible 

organization will still shape future leaders through a progression 

of appropriate assignments. 
64

45. See Edward P. Lazear, “Performance Pay and Productivity,” American Economic Review, Vol. 90, No. 5, 2000, pp. 1346-1361.

46. Ladies Home Journal, April 1898.

47. See Gallup Poll, “Confidence in American Institutions,” 

2014, available from www.gallup.com/poll/1597/Confidence-Institutions.aspx.

48. Abraham Lincoln, Second Annual Message to Congress, December 1, 1862, available from www.presidency.ucsb.edu/

ws/?pid=29503.

49. Rather than simply reviewing base pay for fairness or sufficiency, the 12th Quadrennial Review of Military Compensation 

should use this paper to shape its analytical goals and recommended changes to compensation policy, practice, and law. 
65

ABOUT THE AUTHORS

ROY A. WALLACE, Senior Executive Service, is the 

Assistant Deputy Chief of Staff, Army G1. He was the 

Director of Plans and Resources, Deputy Chief of Staff, 

Army G-1 for 8 years prior to serving in his current 

position. Mr. Wallace retired from Active Duty as a 

colonel in 2004. He has extensive experience in Army 

compensation and resourcing. Mr. Wallace holds a 

B.A. from the University of Arkansas and an M.B.A in 

comptrollership from Syracuse University. 

MICHAEL J. COLARUSSO is a retired Army lieutenant colonel who now serves as Senior Research Analyst 

in the U.S. Army’s Office of Economic and Manpower 

Analysis (OEMA). His areas of research interest include organizational design, generational dynamics, 

human capital, and talent management. Lieutenant 

Colonel (Ret.) Colarusso holds a B.A. in history from 

Saint John’s University and an M.A. in history from 

the Pennsylvania State University.

ANDREW O. HALL is an Army colonel and the Chief 

of Military Personnel (Structure and Plans) for the 

Army G-1. He has served in Operations Research assignments at West Point, in XVIII Airborne Corps, 

and on the Army and Joint staffs. His areas of research 

interest include manpower analysis, applied probability, networks, and operations research. Colonel Hall 

holds a B.S. in computer science from West Point, an 

M.S. in applied mathematics from the Naval Postgraduate School, and a Ph.D. in management science 

and operations management from the Robert H. Smith 

School of Business at the University of Maryland.
66

DAVID S. LYLE is an Army lieutenant colonel, the Director of the U.S. Army OEMA, and an Associate Professor of Economics in the Social Sciences Department 

at West Point, where he teaches econometrics and labor economics. His areas of research interest include 

labor economics, peer effects, human capital, and talent management. Lieutenant Colonel Lyle holds a B.S. 

from West Point and a Ph.D. in economics from the 

Massachusetts Institute of Technology. 

MICHAEL S. WALKER is an Army major, a research 

analyst in the Army’s OEMA, and an Assistant Professor of Economics in the Social Sciences Department at 

West Point, where he teaches the capstone course in 

the Economics of National Security. His areas of research interest include defense economics, industrial 

organization, and talent management. Major Walker 

holds a B.S. from West Point and a Ph.D. in economics 

from the University of Oklahoma.
U.S. ARMY WAR COLLEGE

Major General William E. Rapp

Commandant

*****

STRATEGIC STUDIES INSTITUTE

and

U.S. ARMY WAR COLLEGE PRESS

Director

Professor Douglas C. Lovelace, Jr.

Director of Research

Dr. Steven K. Metz

Authors

Mr. Roy A. Wallace

Lieutenant Colonel (Ret.) Michael J. Colarusso

Colonel Andrew O. Hall

Lieutenant Colonel David S. Lyle 

Major Michael S. Walker

Editor for Production

Dr. James G. Pierce

Publications Assistant

Ms. Rita A. Rummel

*****

Composition

Mrs. Jennifer E. Nevil