Skip Navigation

The pay and benefits of military personnel account for roughly one-third of the defense budget. In the military, as in any organization, an important purpose of the pay system is to encourage good people to pursue a career in the organization and to work hard and perform well. The military rewards performance through promotions to successive ranks and the greater pay that goes with higher rank. Some observers have argued, however, that the rewards are inadequate.

This paper is one product of a study requested by the Chairman of the Subcommittee on Personnel of the Senate Committee on Armed Services. The paper examines the case for changing the military table of basic pay to increase the monetary incentives for service members to work hard and perform well. A forthcoming Congressional Budget Office (CBO) study will focus on the mechanisms through which military pay and allowances are regularly adjusted. In keeping with CBO's mandate to provide objective analysis, this paper makes no recommendations.

Richard L. Fernandez of CBO's National Security Division prepared this paper under the general supervision of Neil M. Singer and Cindy Williams. Ellen Breslin Davidson, Deborah Clay-Mendez, Mark Musell, and Ralph Smith, all of CBO, provided thoughtful comments on an earlier draft. CBO colleagues Shaun Black and Sheila Roquitte gave valuable assistance. The author also gratefully acknowledges the help of the staff of the Directorate for Compensation in the Office of the Assistant Secretary of Defense (Force Management Policy) and of Robert Emmerichs, director of the Eighth Quadrennial Review of Military Compensation.

Sherwood Kohn edited the manuscript, and Christian Spoor provided editorial assistance. Judith Cromwell prepared the paper for publication.
 

June E. O'Neill
Director
December 1995
 
 

I - INTRODUCTION

• Promotions Provide the Only Monetary Reward
• Summary

II - THE STRUCTURE OF MILITARY PAY

III - PERFORMANCE INCENTIVES OUTSIDE THE PAY SYSTEM

• Status and Privilege as Performance Incentives
• Up-or-Out Rules as Performance Incentives

IV - PROMOTION VERSUS LONGEVITY IN THE PAY SYSTEM

• Measuring the Pay Effects of Promotion and Longevity
• The Current Pay Table Compared with the 7th QRMC Alternative
• Accounting for Allowances

V - PAY AND THE SPEED OF PROMOTION

• Fast Versus Slow Promotion
• Retired Pay and the Rewards for Promotion

VI - IS MILITARY PAY TOO COMPRESSED?

• Military and Civilian Pay Profiles
• Current and Past Differentials Between Pay Grades

VII - POLICY OPTIONS

• Retain the Current Pay Table
• Adopt the Pay Table Proposed by the 7th QRMC
• Base Longevity Increases on Time in Grade
• Establish Pay Raises Based on Performance

Higher pay can be an important incentive for workers to perform well, both in civilian employment and in the military. Members of the military receive increases in their compensation by many means--through annual across-the-board raises and periodic longevity increases, for accepting hazardous or arduous duties, even for getting married--but only the raises linked to promotion from one military rank to the next are direct rewards for performance. Private-sector employers, in contrast, may offer bonuses, merit raises, and other incentives.

Various observers have complained that the military pay system may not provide sufficient incentives for members to perform well. Among their concerns are:

• The pay system places too much emphasis on longevity and too little on promotions.
  
  
• Pay does not sufficiently differentiate between people promoted at average times and those promoted rapidly or slowly.
  
  
• Pay is too compressed; that is, the difference in pay between junior and senior personnel is too small.
  
  
• The underlying structure of the military pay system cannot adequately reward performance, requiring a thorough overhaul.

The case for changing the monetary incentives for military personnel to work hard and perform well seems to rest more on impressions and theoretical arguments than on specific evidence of poor performance. The various commissions and policy analysts who have examined military pay generally have not attempted to answer the underlying question: Are there problems of inadequate performance that could be addressed by changes in the pay system? Although individual commanders may know which of their people are performing to the best of their ability and which are not, that information does not make its way to pay analysts in any usable form. Thus, this paper also does not answer that difficult question.

The paper does, however, examine the arguments for changing the military pay system to improve the rewards for performance, exploring a number of ways of looking at incentives and focusing particularly on the work of the Seventh Quadrennial Review of Military Compensation (7th QRMC).¹ The 7th QRMC accepted the bases for the first two concerns--too much emphasis on longevity and insufficient differentiation based on promotion rate--but rejected the need for a thorough overhaul. It recommended changes that would increase the role of promotions in determining service members' pay and reduce the role of longevity, reflecting a view that those factors measure the pay system's rewards for performance.

Most discussions of the monetary rewards for performance in the military focus on the role of military basic pay, although that is only one of several components of a service member's total compensation. The basic pay table sets out pay levels depending on the member's pay grade (determined by military rank) and on the number of years that he or she has served in the military. Thus, the table defines both the raises that members receive upon promotion and their raises for longevity, which generally come after every two years of service. All members also receive allowances for food and housing, either as part of their regular paychecks or in the form of mess-hall meals and government-provided quarters. Because the housing allowances depend on a member's rank, although not on years of service, they also provide a pay raise when the member is promoted.

In addition to the direct elements of pay, members of the military receive two indirect monetary benefits. The first is the so-called tax advantage that results because the allowances for food and housing are not subject to federal income tax. That advantage increases in value as a member progresses through the ranks. Second, military retired pay extends the potential reward from all pay raises. That becomes particularly important as members near 20 years of service, at which time they become eligible to retire.

This document is available in its entirety in PDF.

1. In 1966, the Congress required the Department of Defense to conduct periodic studies of the military pay system, the seventh of which was completed in 1992.