Military Personnel: Comparisons between Military and Civilian Compensation Can be Useful, but Data Limitations Prevent Exact Comparisons
Published: 2010-04-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses our most recent report on military and civilian pay comparisons and the challenges associated with those types of comparisons. The Department of Defense's (DOD) military compensation package, which is a myriad of pays and benefits, is an important tool for attracting and retaining the number and quality of active duty servicemembers DOD needs to fulfill its mission. Since DOD transitioned to an all-volunteer force in 1973, the amount of pay and benefits that servicemembers receive has progressively increased. When it is competitive with civilian compensation, military compensation can be appropriate and adequate to attract and retain servicemembers. However, comparisons between the two involve both challenges and limitations. Specifically, as we have previously reported, no data exist that would allow an exact comparison between military and civilian personnel with the same levels of work experience. Also, nonmonetary considerations complicate such comparisons, because their value cannot be quantified. For example, military service is unique in that the working conditions for active duty service carry the risk of death and injury during wartime and the potential for frequent, long deployments, unlike most civilian jobs. In addition, there is variability among past studies in how compensation is defined (for example, either pay or pay and benefits) and what is being compared. Most studies, including those done by the Congressional Budget Office (CBO) and RAND Corporation, have compared military and civilian compensation but limit such comparisons to cash compensation--using what DOD calls regular military compensation--and do not include benefits. The National Defense Authorization Act for Fiscal Year 2010 required that we conduct a study comparing the pay and benefits provided by law to members of the Armed Forces with those of comparably situated private-sector employees, to assess how the differences in pay and benefits affect recruiting and retention of members of the Armed Forces. Earlier this month, we issued our report. This testimony today summarizes the findings of that report.
section_title: What GAO Found
paragraphs: Comparisons between military and civilian compensation are important management tools--or measures--for the department to use to assess the adequacy and appropriateness of its compensation. However, such comparisons present both limitations and challenges. For example, data limitations and difficulties valuing nonmonetary benefits prevent exact comparisons between military and civilian personnel. Moreover, these comparisons represent points in time and are affected by other factors, such as the health of the economy. To illustrate, it is not clear the degree to which changes in the provision of civilian health care or retirement benefits affect the outcome of comparing military and civilian compensation. In addition, valuing military service is complicated. While serving in the military offers personal and professional rewards, such service also requires many sacrifices--for example, frequent moves and jobs that are arduous and sometimes dangerous. Ultimately, DOD's ability to recruit and retain personnel is an important indicator of the adequacy--or effectiveness--of its compensation.

section_title: Letter
paragraphs: Thank you for providing me this opportunity to discuss our most recent  report on military and civilian pay comparisons and the challenges  associated with those types of comparisons. The Department of Defense’s  (DOD) military compensation package, which is a myriad of pays and  benefits, is an important tool for attracting and retaining the number and  quality of active duty servicemembers DOD needs to fulfill its mission.  Since DOD transitioned to an all-volunteer force in 1973, the amount of  pay and benefits that servicemembers receive has progressively  increased. When it is competitive with civilian compensation, military  compensation can be appropriate and adequate to attract and retain  servicemembers. However, comparisons between the two involve both  challenges and limitations. Specifically, as we have previously reported,  no data exist that would allow an exact comparison between military and  civilian personnel with the same levels of work experience. Also,  nonmonetary considerations complicate such comparisons, because their  value cannot be quantified. For example, military service is unique in that  the working conditions for active duty service carry the risk of death and  injury during wartime and the potential for frequent, long deployments,  unlike most civilian jobs.
In addition, there is variability among past studies in how compensation is  defined (for example, either pay or pay and benefits) and what is being  compared. Most studies, including those done by the Congressional  Budget Office (CBO) and RAND Corporation, have compared military and  civilian compensation but limit such comparisons to cash compensation— using what DOD calls regular military compensation—and do not include  benefits. DOD has also conducted studies comparing military and civilian  compensation as part of its Quadrennial Review of Military Compensation  (QRMC)—a review required by law, every 4 years, of the principles and  concepts of the compensation system for members of the uniformed  services. The 2008 QRMC (the 10th) focused on seven compensation- related areas, including the adequacy of compensation, and it  recommended, among other things, the inclusion of both cash and some  benefits—such as health care—when assessing military compensation.  The 10th QRMC also found that, when some benefits were included,  military compensation compared approximately with the 80th percentile  of comparable civilian compensation—that is, that 80 percent of the  comparable civilian population earned less than the military population in  the comparison. Previously, the 2004 QRMC (the 9th) found that regular  military compensation met the 70th percentile of comparable civilian cash  compensation.
The National Defense Authorization Act for Fiscal Year 2010 required that  we conduct a study comparing the pay and benefits provided by law to  members of the Armed Forces with those of comparably situated private- sector employees, to assess how the differences in pay and benefits affect  recruiting and retention of members of the Armed Forces. Earlier this  month, we issued our report. My testimony today summarizes the findings  of that report. Specifically, my statement will (1) examine total military  compensation for active duty officers and enlisted personnel, (2) compare  private-sector pay and benefits for civilians with those of officers and  enlisted personnel of the Armed Forces, and (3) assess the 10th QRMC’s  recommendation to include regular military compensation and select  benefits when making such comparisons.
We focused our work on active duty servicemembers’ perspectives on  compensation—that is, cash compensation and the value of benefits to  servicemembers versus the costs to the government of providing  compensation. To conduct our work, we identified and reviewed studies  on compensation by such organizations as CNA Corporation (CNA), CBO,  the Congressional Research Service, DOD, GAO, and RAND. We  interviewed officials from DOD’s Office of the Under Secretary of Defense  for Personnel and Readiness, including the Deputy Under Secretary of  Defense for Military Personnel Policy and officials within the Directorate  of Compensation, as well as officials from CNA, CBO, the Defense  Manpower Data Center, the Bureau of Labor Statistics, and the Military  Officers Association of America. To assess total military compensation, we  reviewed a 2008 DOD-commissioned report—completed by CNA—and  identified estimated values for the elements of military compensation (that  is, regular military compensation, health care, retirement, and additional  tax advantages). We also identified the employee benefits available to  active duty servicemembers and used DOD survey data to identify the  utilization rates of these benefits by servicemembers. To compare military  compensation with private-sector pay and benefits of comparable  civilians, we used CNA’s report to identify estimated values for private- sector compensation—pay and benefits—for comparable civilians. In  addition, we reviewed the methods CNA used to estimate values for  several benefits—retirement, health care, and additional tax advantages.  Finally, to assess the 10th QRMC’s recommendation to include regular  military compensation and select benefits when comparing military and  civilian compensation, we conducted a review of recent literature on  compensation—including regular military compensation and select  benefits—and interviewed DOD officials and other knowledgeable  individuals in the fields of compensation and human capital management.  We conducted our work in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Total Military Compensation for Active Duty Officers and Enlisted Personnel Is Broad and Difficult to Assess
paragraphs: DOD provides active duty servicemembers with a comprehensive  compensation package that includes a mix of cash, such as basic pay;  noncash benefits, such as health care; and deferred compensation, such as  retirement pension. The foundation of each servicemember’s  compensation is regular military compensation, which consists of basic  pay, housing allowance, subsistence allowances, and federal income tax  advantage. The amount of cash compensation that a servicemember  receives varies according to rank, tenure of service, and dependency  status. For example, a hypothetical servicemember with 1 year of service  at the rank of O-1 and no dependents would currently receive an annual  regular military compensation of $54,663, whereas a hypothetical  servicemember with 4 years of service at the rank of E-5 and one  dependent would receive an annual regular military compensation of  $52,589. In addition to cash compensation, DOD offers current and  retired servicemembers a wide variety of noncash benefits. These range  from family health care coverage and education assistance to installation- based services, such as child care, youth, and family programs.
While many studies of active duty military compensation have attempted  to assess the value of the compensation package, most did not consider all  of the components of compensation offered to servicemembers. CBO,  RAND, and CNA have assessed military compensation using varying  approaches. All of their studies include some components of  compensation—for example, cash compensation beyond basic pay, which  includes housing and subsistence allowances, the federal income tax  advantage, and, when possible, special and incentive pay. However, these  studies did not assess all components of compensation offered to  servicemembers. Thus, the results of these studies differ based on what is  being assessed, the methodology used to conduct the assessment, and the  components of compensation included in the calculations.
The most recent study, a 2008 DOD-sponsored study performed by CNA,  assessed military compensation using regular military compensation and  some benefits (specifically, health care, the military tax advantage, and  retirement benefits). In particular, the results of this study state that in  2006, average enlisted servicemembers’ compensation ranged from  approximately $40,000 at 1 year of service to approximately $80,000 at 20  years of service. Additionally, in 2006 the average officers’ compensation  ranged from approximately $50,000 at 1 year of service to approximately  $140,000 at 20 years of service. Our analysis of CNA’s 2008 study found  that overall, CNA used a reasonable approach to assessing military  compensation; however, we provided comments on two issues. In general,  we agree that when assessing military compensation for the purpose of  comparing it with civilian compensation, it is appropriate to include  regular military compensation and benefits (as many as can be reasonably  valued from the servicemembers’ perspective). For example, in order to  value health care, CNA estimated the difference in value between military  and civilian health benefits, because servicemembers receive more  comprehensive health care than most civilians.
As mentioned previously, we identified two areas for comment with regard  to CNA’s approach. First, with regard to retirement, health care, and tax  advantage, CNA’s methodology makes various assumptions that allow the  study to calculate approximate values for these benefits. While the  assumptions are reasonable, we note that other, alternative assumptions  could have been made, and thus, in some cases, could have generated  substantially different values. Second, the CNA study omits the valuation  of retiree health care, which is a significant benefit provided to  servicemembers. Nevertheless, we note that CNA’s study and other studies  of military compensation illustrate that valuing total military  compensation from a servicemember’s perspective is challenging, given  the variability across the large number of pays and benefits, the need to  make certain assumptions to estimate the value of various benefits, and  the utilization of benefits by servicemembers or their dependents, among  other reasons.
section_title: Military Compensation Generally Compares Favorably with Civilian Compensation in Studies, but These Comparisons Present Limitations
paragraphs: In comparing military and civilian compensation, CNA’s study as well as a  2007 CBO study, found that military pay generally compares favorably  with civilian pay. CNA found that in 2006, regular military compensation  for enlisted personnel averaged $4,700 more annually than comparable  civilian earnings. Similarly, CNA found that military officers received an  average of about $11,500 more annually than comparable civilians.  Further, CNA found that the inclusion of three military benefits—health  care, retirement, and the additional tax advantage for military members— increased the differentials by an average of $8,660 annually for enlisted  servicemembers and $13,370 annually for officers. A 2007 CBO study  similarly found that military compensation compares favorably with  civilian compensation. For example, CBO’s report suggested that DOD’s  goal to make regular military compensation comparable with the 70th  percentile of civilian compensation has been achieved. We note that the  major difference between the two studies lies in their definitions of  compensation. CNA asserted, and we agree, that the inclusion of benefits  allows for comparisons of actual levels of compensation and provides  some useful comparison points for determining whether servicemembers  are compensated at a level that is comparable to that of their civilian  peers, although the caveats that we discuss below should be considered.  CBO also noted, and we agree, that including benefits can add another  level of complexity to such analytical studies.
However, while these studies and comparisons between military and  civilian compensation in general provide policymakers with some insight  into how well military compensation is keeping pace with overall civilian  compensation, we believe that such broad comparisons are not sufficient  indicators for determining the appropriateness of military compensation  levels. For example, the mix of skills, education, and experience can differ  between the comparison groups, making direct comparisons of salary and  earnings difficult. While some efforts were made by CNA to control for age  (as a proxy for years of experience) and broad education levels, CNA did  not control for other factors, such as field of degree or demographics  (other than age), that we feel would be needed to make an adequate  comparison. As another example, one approach that is sometimes taken to  illustrate a difference, or “pay gap,” between rates of military and civilian  pay is to compare over time changes in the rates of basic pay with changes  in the Employment Cost Index. We do not believe that such comparisons  demonstrate the existence of a pay gap or facilitate accurate comparisons  between military and civilian compensation because they assume that  military basic pay is the only component of compensation that should be  compared to changes in civilian pay and exclude other important  components of military compensation, such as the housing and  subsistence allowances. We note that CBO also previously discussed three  other shortcomings of making such comparisons in a 1999 report.  Specifically, CBO noted that such comparisons (1) select a starting point  for the comparison without a sound analytic basis, yet the results of the  pay gap calculation are very sensitive to changes in that starting point; (2)  do not take into account differences in the demographic composition of  the civilian and military labor forces; and (3) compare military pay growth  over one time period with a measure of civilian pay growth over a  somewhat different period.
section_title: 10th QRMC’s Recommendation to Include Regular Military Compensation and Select Benefits When Comparing Military and Civilian Compensation Appears Reasonable
paragraphs: The 10th QRMC’s recommendation to include regular military  compensation and select benefits when comparing military and civilian  compensation appears reasonable to us because it provides a more  complete measure of military compensation than considering only cash  compensation. Given the large proportion of servicemember  compensation that is comprised of in-kind and deferred benefits, the 10th  QRMC emphasized that taking these additional components of  compensation into account shows that servicemember compensation is  generous relative to civilian compensation—more so than traditional  comparisons of regular military compensation suggest. The 10th QRMC  also recommended that in order to maintain the standard established by  the 9th QRMC’s 70th percentile (which includes only regular military  compensation), DOD adopt the 80th percentile as its goal for military  compensation when regular military compensation and the value of some  benefits, such as health care, are included in the analysis. In general, when  comparing military and civilian compensation, a more complete or  appropriate measure of compensation should include cash and benefits.  When considering either a military or a civilian job, an individual is likely  to consider the overall compensation—to include pay as well as the range  and value of the benefits offered between the two options. The challenge  with this approach, as mentioned previously, lies in determining how to  “value” the benefits, and which benefits to include in the comparison.
Prior to issuing our report earlier this month the Deputy Under Secretary  of Defense for Military Personnel Policy provided us with oral comments  on a draft of the report. The Deputy Under Secretary generally agreed with  our findings, noting that numerous studies have attempted to estimate the  value military members place on noncash and deferred benefits and that  each study has found that identifying relevant assumptions, valuing these  benefits, and finding appropriate benchmarks and comparisons are  significant challenges. Noting the variation in the results of these studies,  the Deputy Under Secretary stated that further study is necessary before  DOD is willing to consider measuring and benchmarking military  compensation using a measurement that incorporates benefits.
While comparisons between military and civilian compensation are  important management measures, they alone do not necessarily indicate  the appropriateness or adequacy of compensation. Another measure is  DOD’s ability to recruit and retain personnel. We have reported in the past  that compensation systems are tools used for recruiting and retention  purposes. Similarly, in 2009, CBO stated that ultimately, the best  barometer of the effectiveness of DOD’s compensation system is how well  the military attracts and retains high-quality, skilled personnel. Since  1982, DOD has only missed its overall annual recruiting target three  times—in 1998 during a period of very low unemployment, in 1999, and  most recently in 2005. Given that (1) the ability to recruit and retain is a  key indicator of the adequacy of compensation and (2) DOD has generally  met its overall recruiting and retention goals for the past several years, it  appears that regular military compensation is adequate at the 70th  percentile of comparable civilian pay as well as at the 80th percentile  when additional benefits are included. We note that although the services  have generally met their overall recruiting goals in recent years, certain  specialties, such as medical personnel, continue to experience recruiting  and retention challenges. As a result, permanent, across-the-board pay  increases may not be seen as the most efficient recruiting and retention  mechanism. In fact, our previous work has shown that use of targeted  bonuses may be more appropriate for meeting DOD’s requirements for  selected specialties where DOD faces challenges in recruiting and  retaining sufficient numbers of personnel.
section_title: Concluding Observations
paragraphs: In closing, we note that comparisons between military and civilian  compensation are important management tools—or measures—for the  department to use to assess the adequacy and appropriateness of its  compensation. However, such comparisons present both limitations and  challenges. For example, data limitations and difficulties valuing  nonmonetary benefits prevent exact comparisons between military and  civilian personnel. Moreover, these comparisons represent points in time  and are affected by other factors, such as the health of the economy. To  illustrate, it is not clear the degree to which changes in the provision of  civilian health care or retirement benefits affect the outcome of comparing  military and civilian compensation. In addition, valuing military service is  complicated. While serving in the military offers personal and professional  rewards, such service also requires many sacrifices—for example,  frequent moves and jobs that are arduous and sometimes dangerous.  Ultimately, DOD’s ability to recruit and retain personnel is an important  indicator of the adequacy—or effectiveness—of its compensation.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions that you or members of the subcommittee may  have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Brenda S.  Farrell, Director, Defense Capabilities and Management, at (202) 512-3604,  or farrellb@gao.gov. Key contributors to this statement include Marion A.  Gatling, Assistant Director; K. Nicole Harms; Wesley A. Johnson; Susan C.  Langley; Charles W. Perdue; Jennifer L. Weber; and Cheryl A. Weissman.  Other contributors include Natalya Barden, Margaret Braley, Timothy J.  Carr, and Patrick M. Dudley. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this testimony.
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