GAO-11-318SP: Defense: Total compensation approach is needed to manage significant growth in military personnel costs

Defense

Total compensation approach is needed to manage significant growth in military personnel costs

Why Area Is Important

Over the years, the Department of Defense's (DOD) military compensation system has become an increasingly complex and piecemeal addition of pays, allowances, and benefits costing over $200 billion each year. Pay and benefits are important tools used by DOD to recruit, retain, and motivate sufficient numbers—approximately 1.4 million active duty and 1.2 million reservists—of qualified people. In recent years, Congress has taken steps to fund enhanced compensation and benefit programs for active duty and reserve personnel at a time when many military personnel are spending months or years away from home, often in harm's way. DOD leaders have expressed concern about growing personnel costs and their effect on other important investments, such as recapitalizing equipment and infrastructure.

In 2005 and in 2007, GAO found that the cost for military compensation was significantly increasing, and the total cost for compensation was not transparent because it was spread across different budgets within DOD. GAO recommended that DOD improve the transparency of compensation costs and assess the appropriateness of its compensation system.

What GAO Found

DOD and Congress have expanded military pay and benefits using a piecemeal approach rather than a total compensation approach that could help to balance the appropriateness, affordability, and sustainability of personnel-related costs. GAO has estimated that the federal government's total compensation costs for active duty servicemembers increased about 32 percent, using fiscal year 2008 constant dollars, from $143.8 billion in fiscal year 2000 to $189.4 billion in fiscal year 2008. Also, GAO found that using fiscal year 2008 constant dollars, the federal government's total estimated compensation for reserve and national guard members grew over 31 percent from about $17.8 billion in fiscal year 2001 to nearly $23.5 billion in fiscal year 2008. Basic pay alone, the largest component of active duty military compensation, has increased from $45 billion to $50.1 billion between fiscal years 2000 and 2008. In addition to basic pay, DOD expends billions of dollars each year to recruit, retain, and motivate its personnel using other pays and benefits. For instance, in fiscal year 2008, for active duty servicemembers, DOD spent $17.1 billion on non-taxable housing allowances; $6.4 billion on special and incentive pays, such as enlistment and re-enlistment bonuses; $10.9 billion on health care for active duty servicemembers and their dependents[1]; and $31.4 billion on retirement pay and retiree health care.

Much of the increase in basic pay in recent years has been driven by concerns that military basic pay was not equivalent to civilian (or private sector) pay, without taking into consideration other types of compensation beyond basic pay. GAO reported in April 2010 that studies done by the Congressional Budget Office and the Center for Naval Analyses concluded that when pay and some benefits are taken into account, military compensation compares favorably to civilian compensation when considering personnel of similar age and education level. GAO also reported that when comparing military and civilian compensation, it is reasonable to take into account other types of compensation than basic pay. For example, according to DOD, in 2010 the basic allowance for housing for an O-5 (i.e., a lieutenant colonel) with dependents living in the Washington, D.C., metro area is approximately $2,900 a month. In addition, recent growth of total compensation has been driven by the costs for deferred compensation, primarily attributed to enhanced health care benefits, and DOD officials anticipate significant continued growth in health care costs because of these expansions in coverage.

DOD has sponsored some efforts to assess its military personnel compensation strategy, such as the 10th Quadrennial Review of Military Compensation, which was released in 2008, but these reviews have not been comprehensive, and the department does not know the extent to which the current mix of pays and benefits is best suited to meet its human capital goals. Further, GAO's work has shown that DOD is unable to demonstrate the efficiency and effectiveness of these changes in meeting its recruiting and retention goals because it does not have performance measures for its compensation system. Without performance measures, DOD cannot determine the return on its compensation investment or make fact-based choices on how its compensation resources should be allocated.



[1]This is an estimated cost for providing active duty servicemembers and their dependents health care. It does not include costs such as medical personnel salaries or construction costs of medical facilities. However, a more comprehensive medical cost for DOD is the Unified Medical Budget, which for fiscal year 2010 was about $50 billion. This cost includes military medical personnel costs, construction cost of any medical facilities, operation and maintenance funds, procurement funds, and research and development funds.

Actions Needed

Using a total compensation approach in making decisions about military pay and benefits would provide DOD with an important tool for more efficiently and effectively managing its human-capital-related costs. Assessing the mix of pay and benefits and developing a comprehensive compensation strategy could enable DOD to more effectively recruit and retain a highly qualified force with the right skills in sufficient numbers to carry out its mission while minimizing unnecessary cost increases. GAO has recommended in the past that DOD (1) assess the affordability and sustainability of its military compensation system, as well as the reasonableness and appropriateness of the allocation to cash and benefits, and whether changes in the allocation are needed to more efficiently achieve recruiting and retention goals; and (2) establish a clear compensation strategy that includes performance measures to evaluate the efficiency of compensation in meeting recruiting and retention goals and use of data from the performance measures to monitor the effectiveness of compensation and assess what mix of compensation will be most efficient in the future.

DOD concurred with GAO's recommendation to assess the affordability and sustainability of its military compensation system and stated that it is engaged in multiple simultaneous efforts to assess the overarching strategy. GAO acknowledges that DOD has sponsored and engaged in a number of studies looking at aspects of compensation, such as the Quadrennial Review of Military Compensation, but the department has not taken a total compensation approach to assessing compensation.

DOD partially concurred with GAO's recommendation to establish a clear compensation strategy noting that it has consistently communicated its approach to Congress in congressional testimony. GAO continues to assert that with a total compensation strategy the department would be in a better position to make business case arguments for or against changes to its compensation system, and provide fact-based evidence regarding the efficiency of the allocation of cash, noncash, or deferred compensation.

GAO's prior work has indicated that compensation areas should have closer scrutiny in terms of continued need and the potential to reduce unnecessary costs. For example, GAO reported in 2006 and 2009 instances of excessive payments of enlistment and re-enlistment bonuses (types of special and incentive pays) to servicemembers in occupations that exceeded their authorized levels while other occupations were underfilled. GAO recommended that DOD, among other things, assess reasons occupations are over- or underfilled and justify use of financial incentives for overfilled occupations. As a result of GAO's findings and recommendations, DOD developed a more rigorous approach to managing and overseeing its recruiting and retention bonuses leading to savings totaling $947.3 million. More broadly, DOD could recognize long-term cost avoidance by addressing in a compensation strategy what types of compensation are effective and not incurring costs for compensation that may not be effective in helping the department achieve its recruiting and retention goals.

Framework for Analysis

The information contained in this analysis is based on the related products listed under the "Related GAO Products" tab.

Area Contact

For additional information about this area, contact Brenda Farrell at (202) 512-3604 or farrellb@gao.gov.

Related GAO Products

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Questions for the Record Related to Military Compensation
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Published: Jun 3, 2010. Publicly Released: Jun 3, 2010.

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Reserve Component Servicemembers on Average Earn More Income while Activated
GAO-09-688R:
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