Human Capital:

Questions for the Record Related to Military Compensation

GAO-10-803R: Published: Jun 3, 2010. Publicly Released: Jun 3, 2010.

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GAO testified before a Congressional subcommittee on April 28, 2010, to discuss current issues related to military compensation. This letter responds questions for the record from the hearing. (1) Is the ECI an appropriate index to use to adjust military basic pay rates annually? If not, is there a benchmark that is more appropriate? (2) Please explain what the impact on the Defense budget would be if Congress directed an increase in the pay raise by one percent, or half a percent without offsets. (3) Is there a better metric than the ECI to gauge what an annual pay raise should be? (4) Does the current pay table need adjustment? (5) What do you think the effect of reducing the requirement for entitlement to retired pay below 20 years would be on the ability to retain the personnel we need in leadership positions in the Armed Forces? (6) Last year, the Navy Exchange Service Command generated more than $45 million in dividends. These figures seem to indicate that commissary and exchange benefits are not especially costly to DOD and that service members place a high value on these benefits. How can these figures inform the Department in maintaining a competitive cash and non-cash compensation package for service members and providing it in such a way that is affordable to the Department?

(1) In our April 1, 2010 report, we noted that using the Employment Cost Index (ECI) for the purpose of determining the amount of the annual basic pay raise for servicemembers has both strengths and weaknesses, but is generally reasonable to use to adjust such pay annually. It should also be noted that basic pay is just onecomponent of the total military compensation package. (2) Any increase in basic pay--whether it is equivalent to the ECI or some percentage above the ECI--results in additional near-term and long-term costs to compensate servicemembers. In recent years, the additional one-half percentage point has been added in order to reduce a perceived gap between military and private-sector pay. However, as our recent work comparing military and civilian compensation asserts, we do not believe that comparing changes in the ECI with changes in the rates of basic pay shows there is a difference, or "pay gap," between the two, or that such comparisons facilitates the assessment of how military pay rates compare with what civilian employers provide. (3) As we have reported and as noted above, using the ECI for the purpose of determining the amount of the annual basic pay raise for servicemembers has both strengths and weaknesses but is generally reasonable to use to adjust such pay annually. It should also be noted that basic pay is just one component of the total military compensation package. (4) While we have not previously assessed whether the current pay table needs adjustment, we have for over three decades reported that the current military compensation package has been the result of piecemeal changes and adjustments over time and lacks overall guiding principles. Regarding targeted changes to pay, we have reported that across-the-board pay increases fail to target resources where they are most needed and they affect a variety of other costs--such as retired pay. Rather, the targeted use of compensation--such as special pays and bonuses for particular occupational skills--tends to maximize limited resources and help make recruiting and retention gains in needed areas. (5) In the absence of any identified weaknesses in the overall recruiting and retention rates, it is difficult to determine if problems exist that would be best corrected through changes to the current retirement system. Further, our prior work has shown that benefits, especially deferred benefits like retirement, are a relatively inefficient way to influence recruiting and retention, as compared with cash pay. (6) While these figures are informative in terms of servicemember use of the commissary and the cost of operating the commissary, in the absence of additional data and information on how servicemembers value the commissary, these figures cannot appropriately inform DOD on affordably maintaining a competitive cash and noncash compensation package for servicemembers.

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