DOCUMENT RESUME 02873 - [A2153253] Military Compensation Should Be Changed to Salary System. FPCD-77-20; B-163770. August !, 1977. 34 pp. + 6 appendices (13 pp.). Report to the Congress; by Elmer B. Staats, Comptroller General. Issue Area: Personnel Management and Compensation (300). Contact: Federal Personnel aid Compensation Div. Budget Function: National Defense: Department of Defense - Military (except procurement F, contracts) (051); Veterans Benefits and Services: Income Security for Veterans (701). Organization Concerned: Department of Defense; Office of Management and Budget. Congressional Relevance: House Committee on Armed Services; Senate Committee on Armed Services; Congress. Authority: Career Compensation Act of 1949 (63 Stat. 802). Federal Salary Act of 1967, title II (P.L. 90-206; 81 Sta'. 642). (P.L. 89-1-2, sec. 2; 79 Stat. 545, 546; 37 U.S.C. 1008(b)). (P.L. !13--155; 87 Stat. 605). 5 US.C. 5308. 37 U.S.C. 1009. S. Rept. 94-446. Military compensation should help the services successfully compete with other employers for the personnel they require. Study groups and commissions have repeatedly pointed out that the base pay and allowances system is an inefficient way to support this objective and have recommended that it be replaced by a salary system. Findings/Conclusions: Measuring regular military compensation is complicated, and even those individuals being compensated cannot easily determine their pay. The base pay and allowances system is also inequitable. The regular military compensation is greater for married members than for single members of the same grade and length of service. The base pay and allowances system conceals the cost of military personnel through the provision of goods rather than cash and particularly through tax advantage. A salary system would increase members' awareness of their pay; remove inequities in pay; and make the cost of military personnel easier to identify. Suggested methoas of converting to a salary system include: (1) developing salaries based on the pay f a designated segment of civilian employees, or (2) developing salaries based on current levels of regular military compensation. Recommendations: The Congress should replace the military base pay and allowances system with a salary system. (Authcr/SC) REPOR'T TO TIlE1 ( ONG;(R ESS o se _ - BY THE C'OMPTROLLER G(ENERAL l,, , .- OF THE UNITEL)STA TE'l'; 0:' Military Compensation Should Military Compensation Should Be Changed To Salary System Department of Defense The purpose of military compensatiorn is to assist the services in successfully competing with other employers for the military person- nel they require. The base pay and allowances system is an inefficient means of supporting this objective nd should be replaced by d salary system. FPCD-77 -20 AUGUST 1, 1977 COMPTROLLER GENERAL. OF HE UNITED STATES WASHINGTON, D.C. 20848 - 163770 To the President of the Senate and the Speaker of the ouse of Representatives This report discusses the :.eed for a change in structure of the military compensation the system to efficiently support the attraction and retention programs of the ALied Forces. We made our review pursuant to the Budget and Act, 1921 (31 U.S.C. 53), and the Accounting and Accounting Auditing Act of 1950 (31 U.S.C. 67). Advance comments from the Department of Defense, were requested by March 1, 197i, which were not received in time to be considered in preparing this final report. However, the Department stated in its comments that it would recommendations of the President's Commisssion await the on Military Compensation before taking a position on changes to the form f military pay. We did consider the Department of Defense position on the salary recommendation of the Defense Manpowor Commission in the report. Copies of this report are being sent to the Director, Office of Management and Budget, and to the Secretaries Defense; Commerce; Transportation; and Health, of Education, and Welfare. Lomptroller Gener-l of the United States COMPTROLLER GENERAL'S MILITARY COMPENSATION SHOULD REPORT TO THE CONGRE&,S BE CHANGED TO SALARY SYSTEM Department of Defense DIGEST The Congress should replace the military base pay and allowances system with a salary system. (See pp. 31 to 34.) Military compensation should help the serv- ices successfully compete with other employ- ers for the personnel they require. Study groups and commissions have repeatedly pointed out that the base pay and allowances system is an inefficient way to support this objective and have recommended that it be re- placed by a salary system. (See pp. 1 to 3.) BENEFITS OF A SALARY SYSTEM Regular military compensation, the military equivalent of a civilian salary, has four parts. (See p. 5.) --Basic pay, which all members receive in taxable cash. --The nontaxable value uf housing provided by the Government or a nontaxable cash allow- ance for quarters when Government housing is not provided. -- The nontaxable value of meals provided by the Government or a nontaxable cash allow- ance for subsistence when meals are not provided. -- Tax advantage, which is the additional cash income a serviceman would need in order to leave him with the same take-home pay he now has if all his regular military compen- sation were subject to Federal income taxes. Measuring regular military compensation is com- plicated, and even those individuals being com- pensated cannot easily determine their pay; regular military compensation was underestimated FPCD-77-20 TAir.bSJ. Upon removal, the report .over date should be noted hereon. i by 40 percent of enlisted personnel and 20 per- cent of officers. Clearly, compensation which is not recognized does not help to attract and retain personnel and is an inefficient use of compensation resources. (See pp. 5 to 7.) The base pay and allowances system is also in- equitable. The regular military compensation is greater for married members than for single members of the same grade and length of serv- ice, even if their duties, qualifications, and performance are equivalent. (See pp. 7 and 8.) The base pay and allowances system conceals the cost of military personnel through the prcvision of goods, rather than cash, and par- ticularly through tax advantage, which is not reflected in the Defense budget but is a cost to the Government reflected in reduced Federal income tax revenue. (See p. 7.) A salary system would -- increase members' awareness of their pay, -- remove inequities in pay, and -- make the cost of military personnel easier to identify and evaluate. METHODS O CONVERTINC TO A SALARY SYSTEM Two methods of determining military salary levels have been considered in previous studies. -- Developing salaries based on the pay of a designated segment of civilian employees. (See pp. 16 to 18.) -- Developing salaries based on current levels of regular military compensation. (See pp. 18 to 20.) Determining pay le'vels by a pay standard would assure both managers ad members that military pay was set and maintained on a par with pay ii of other employees. Confidence in the tem's stability and fairness would then sys- develop. This concept has been studied frequently in the pas t 10 years, with no change. (See pp. 17, 18, 33, and 34.) The second method could probably be put practice more quickly. Also, since pay into levels would remain essentially the at present, attraction and retention same as sonnel should not be adversely affected.of per- An examination of the effects of such conver- sion, which GAO con:iders nly an initial steps should show what additional changes military pay would be desirable and should in place both the Congress and the Department of Defense in a good po ition to evaluate the military compensation system. (See p. 34.) A study group within Defense has developed preliminary estimates of conversion costs for our alternatives using the regular military compensation method. Estimates range from $700 million to $1.18 billion. (See pp. 24 to 26.) OTHER ISSUES TO BE CONSIDERED When converting to a salary system, the following issues should also be carefully considere. -- How other elements of compensation, are now computed based on the value which of an element of the regular military compensa- tion, should be computed under a salary system. (See pp. 27 and 28.j -- The method of adjusting military salaries in the future. (See pp. 28 and 29.) -- The effect of salary limitations on flag and general officer pay. (See pp. 29 and 30.) Advance comments from the Department Defense, which were requested by Marchof 1, 1977, have not beer received. However, its response to the salary recommendationin of the Defense Manpower Commission, the iii Department of Defense stated that the advan- tages of a salary system are outweighed by the disadvantages. GAO has evaluated the disadvantages cited and disagrees with the Department's position. (See pp. 31 to 32.) iv C o n t e n t s Page DIGEST CHAPTER 1 INTRODUCTION 1 Long-recognized need: conversion to a salary system 1 Scope of review 4 2 BENEFITS OF A SLARY SYSTEM 5 Visibility uf pay 5 Equity 7 3 EXPERIENCE OF OTHER COUNIRIES 9 Australia 9 Canada 10 United Kingdom 12 4 METHODS OF CONVERTING TO A SALARY SYSTEM 16 Salaries based on pay of a designated segment of civilian employees 16 Reexpress current levels of RMC into a salary 18 Cost to onvert to salary--RMC method 20 Conversion effect on the DOD budget 22 5 OTHER ISSUES TO BE CONSIDERED 27 Reexpression of other compensation items 27 Method of adjusting military salaries 28 Effect of salary limitations on flag and general officer pay 29 6 CONCLUSIONS, AGENCY COMMENTS, AND RECOM- MENDATIONS 31 Conclusions 31 Agency comments and our evaluation 31 Recommendations to the Congress 34 APPENDIX I BAQ rates and es, mated cost of Government quarters 35 II Drag alongs 36 APPENDIX Page III Letter dated March 8, 1977, from the Deputy Associate Director for Na- tional Security, Office of Manage- ment and Budget 37 IV DOD position on the Defense Manpower Commission salary recommendation 39 V Letter dated June 27, 1977, from the Principal Deputy Assistant Secretary of Defense (Manpower Reserve Affairs and Logistics), Department of Defense 41 Vi Principal DOD officials responsible for the activities discussed in this re- port 47 ABBREVIATIONS BAQ basic allowance for quarters BAS basic allowance for subsistence DOD Department of Defense FICA Federal Insurance Contributions Act GAO General Accounting Officc CMB Office of Management and Budget RMC regular military compensation CHAPTER 1 iNTRODUCTION The military compensation system of the United States Uiffers from most civilian compensation systems in the ex-- tent to which it undertakes to satisfy personal living quirements with goods, services, and facilities and in re- way in which it compensates according to marital and the de- penaency status as well as to grade and length of service. Military compensation includes three components; regu- lar military compensation (RMC), Lonuses and special pays, and supplemental benefits. RMC includes a cash basic pay based on the member's grade and length of service and such it"ms as housing and meals or cash allowances when these items are not provided by the Government. Bonuses and special pays are employed to supplement base py and al- lowances where needed to attract, retain, and motivate military personnel to specific duties and occupations. Supplemental benefits include retirement, medical caie, cial security, and death gratuity. The staff of the Thirdso- Quadrennial Review of Military Compensation estimated per- sonnel compensation for fiscal year 1976 as follows: Amount (billions) RMC: $21.5 Basic pay $15.5 Quarters 2.9 Subsisence 1.9 Tax advantage 1.2 Bonuses and special pays 1.2 Supplemental benefits 7.6 Total a/S30.3 a/Some compensation costs were excluded from these estimates, such as commissary and exchange benefits. LONG RECOGNIZED NEED: CONVERSION TO A SALARY SYSTEM In 1947 the Secretary of Defense appointed the Advisory Commission on Service Pay (the Hook Commission) to review the adequacy of military compensation and the soundness pay structures. of military The Secretary's letter of invitation to pro- spective Commission members stated: I "The number and caliber of men who have left the Services in the past year, and the ontinuing number of such separations, indicate the possibility that the Services are not in a position to compete on an equal basis with industry and the professions because of the disparity in the income offered. If this is true, it portends the most serious long-range con- sequences, for it is plain, I think, that the strength and adequacy of our military establishment depends on the quality of the men which it can attract." In its report in 1948, the Hook Commission held that during peacetime the Government had to compete with private industry and the Government's civilian branches for quali- fied personnel. Consequently, the Commission concluded that, in order to attract and retain qualified personnel: "The pay structure should offer initial compensation and progressive increases that compare with what a serviceman could expect in other professions and occupations requiring similar ailities." This philosophy of military pay was embodied in the Career Compensation Act of 1949 (the act of Oct. 12, 1949, 63 Stat. 802). The Hook Commission further hd that, "In the future * * it is to be hoped that compensation for the Uniformed Forces will con- sist of a single payment without distinction between compensation for responsibility and work performed and reimbursement for subsistence and quarters. Basic compensation will then be on the same footing as compensation in private in- dustry and in civil government." On the basis of this recommendation, the President recom- mended that a "gross pay" (salary) system for the military be instituted. However, no legislation was submitted and no such restructuring of the military pay system occurred. Under 37 U.S.C. 1008(b) as added by section 2 of Public Law 89-132 of August 21, 1965 (79 Stat. 545, 546), the President is required to direct a uadrennial review of the principles and concepts of the military compensation system. In 1967 the First Quadrennial Review of Military Compensation pointed out that changes in the military compensation structure were needed to insure the maximum effectiveness of compensation expenditures. Problems cited were that military personnel 2 lacked confidence in the pay structure because it was complex and confusing; it did not reward members could not be easily equitably; and pay compared with, or adjusted in relation to, trends in civilian earnings. As a result, the First Quadrennial Review renommended a sa'ary military members. However, legislation system for career embodying this recom- mendation was not submitted to the Congress. In February 1970 the President's Commission Volunteer Armed Force (the Gates ComrLssion) on an All- sizable increases in military pay for stated that the early years of service were required to sustain The Commission further stated thatan all-volunteer service. necessary to insure the efficiency a salary system was porting attraction and retention of of compensation in sup- volunteers. Based, in part, on the recommendations of the Gates Commission. Public Law 92-129 (the act of Sept. 28, 1971, included sizable increases in entry 85 Stat. 348), which level pay, was enacted in 1971. However, the pay and allowances retained. structure was The Defense Manpower Commission, created Law 93-155 of November 16, 1973 (87 under Public Stat. rary Commission charged wiLh conducting 605). was a tempo- of defense manpower matters. In its a comprehensive study April 1976, the Commission pointed outfinal report issued in that the pay and al- lowances structure was inequitable. lacked visibility, and was inefficient and recommended conversion to a salary system. An indication of the interest structuring the military pay system of the Congress in re- Senate Appropriations Committee in was expressed by the of Defense appropriations for fiscalits report on Department 94-446). year 1976 (S. Rept. "* * * The inherent complexity of the present mili- tary pay system defies logical analysis or percep- tion of total compensation, let alone bility with any other sector. The its compara- majority of military members are, themselves, not the true value of their pay * * *. aware of The permanent solution is to revise the outmoded and confusing structure of the military pay system." In December 1976 the Third Quadrennial Military Compensation published the Review of results of its review. Its draft final report recommended against a salary system. converting to 3 SCOPE OF REVIEW We identified and evaluated what we believed were the key questions in examining the issue of a military salary system. -- Would it be beneficial to change to a salary sys- tem? -- What has been the experience of other countries with military salary systems? -- What are the methods and costs of converting to a salary system? --,;hat related issues need to be examined in order to convert to a salary system? We rviewed the legislative history of military com- pensation and earlier military pay studies and consulted compensation authorities. We examined the military com- pensation systems and experiences of other countries with volunteer forces that have converted to salary systems. Our review was performed at the Department of Defense, the finance centers of the military services, the Defense Ministries of Canada and the United Kinqdom, and the Embassy of Australia. 4 CHAPTER 2 BENSFYTS OF A SALARY SYSTEM The basic objective of military compensation is to as- sist in attracting, retaining, and motivating qualified ice members. Military compensation would be more visibleserv- and equitable under a salary system, and more effective in achieving the objective thus it would be of military com- pensation. VISIBILITY OF PAY The services must compete with other employers for quantity and quality of personnel necessary to satisfy the military manpower requirements. For many military members and prospective members, compensation is an important con- sideration in deciding for or against a military enlistment or career. In this context, comparisons of military pay with pay offered by other employers are influential. To make reasonably accurate pay comparison, dividual must be able tc compute military pay. Thethe in- base pay and allowances system makes this a difficult task. RMC, the military equivalent of a civilian salary, consists of four components. -- Basic pay, which is received in taxable cash by all members. --The nontaxable values of housing provided by the Government or a cash basic allowance for quarters (BAQ) when Government housing is not provided. -- The nontaxable values of meals provided by the )vernment or a cash basic allowance for subsis- tence (BAS) when meals are not provided. -- Tax advantage, which is the amount of additonal cash income a serviceman would need in order to leave him with the same take-home pay he now has if all his regular military compensation were subject to Federal income taxes. The difficulty in computing RMC is largely due to (1) the valuation of Government-provided housing and subsistence and (2) the estimation of tax advantage. 5 The valuation of Government-provided housing may be difficult because there is a wide range in the quality of quarters to which members may be assigned during their careers. For example, a single member on sea duty is as- signed a bunk on a ship; on a land-based tour, he may be assigned a nicely furnished efficiency apartment in one of the new bachelor residence halls. Therefore the indi- vidual may have difficulty in deciding what quality of quarters to use as a basis for attaching a cash value thereto. He may then have difficulty in assigning a value to the quarters; the estimate could be based on (1) the cost of uarters to the Government, (2) the cost of ob- taining similar quarters on the civilian economy, or (3) the amount of cash he would receive if he were drawing BAQ. These amounts will probably differ according to which ap- proach is used. Similar difficulties are encountered in valuing Government-provided subsistence. The estimation of tax advantage is a complicated task. The value of tax advantage depends on the indivudual's particular circ mstances, including whether he receives cash allowances r Government-provided housing and subsist- ence, family size, income tax bracket, tax deductions, tax return methods, and any other factors influencing the in- dividual's tax liability. Consequently, accurate estimation of tax advantage requires going through a set of Federal in- come tax calculations. The result is that even those individuals being com- pensated by the system cannot easily determine their pay. In our recent report, "Need to Improve Military Members' Perceptions of Their Compensation" (FPCD-75-172, Oct. 10, 1975), we pointed out that lack of visibility of pay among military members was widespread. RMC was underestimated by 40 percent of enlisted personnel and 20 percent of of- ficers. Clearly that portion of compensation which is not recognized by those being compensated provides no incentive in terms of attraction, retention, and motivation. It con- sequently represents an inefficient use of compensation resources. The report also pointed out that members who under- estimated their pay were more likely to indicate they would leave the service. A potential effect is that personnel needed to satisfy military manpower requirements may opt for other careers based on erroneous assessments of rela- tive financial rewards. This, in turn, could result in 6 unnecessary increases in military pay in an effort to aid attraction and retention programs. We believe that reexpressing military pay as a fully taxable salary would insure that members fully recognize their RMC and thus reduce the potential for unnecessary compensation expenditures. The base pay and allowances system, through its provision of items, rather than cash, and particularly through tax advantage, conceals the cost of military manpower. Tax advantage is not reflected in the Department of Defense (DOD) budget, but it is a cost to the Government reflected in re- duced Federal income tax revenue. On the other hand, gross salary costs for DOD's personnel are reflected in the DOD budget. civilian A potential ad- verse effect is that, in considering, for example, the advisability and cost effectiveness of military/ ivilian manpower substitutions, military personnel may (~pear to be less costly than civilians although this may not, in fact, be the case. We believe that the total cost of military manpower should be reflected in the DOD budget. A military salary system wculd aid in achieving this result. EQUITY The base pay and allowance system is inequitable. compensates married and si gle members of the same it grade and length of service differently, regardless of whether their duties, qualifications, and performance are equiva- lent. Married members receive higher cash quarters allow- ances or are assigned to larger Government quarters than single members of the same grede and length of service. (App. I shows the variations in quarters rates.) In addition, married enlisted members general y a cash subsistence allowance and may buy their receive meals any- where they choose, including the military dining Single enlisted members generally do not receive halls. a cash subsistence allowance. Their meals are provided in mili- tary dining halls. When the single member elects to eat somewhere other than at a military dining hall, he must pay for the meal out of his basic pay and forego part of his 7 pay, the Government-provided meal. In similar circumstances, the member receiving the cash allowance foregoes no part of his pay. Married personnel are more costly than single personnel because of differences in quarters and subsistence costs and because of other existing benefits, such as dependents' medical care. A compensation system, in our opinion, should be based on members' duties and responsibilities. A compensation system that provides different pay levels based on marital status is inequitable and inefficient. A salary system under which all members of the same grade and length of service are paid the same salary would reduce discrepancies in pay between married and single members. Members residing in Government quarters and/or taking meals in Government dining facilities would then be charged an appropriate fee for these items. CHAPTER 3 EXPERIENCE OF OTHER COU'TPRIES Australia, Canada, and the United their armed fcrces on a volunteer basis Kingdom maintain and have discarded pay and allowances structures similar to that of the United States in favor of a salary system. Their major reasons for converting to a salary system included considerations similar to our own--military pay lacked visibility inequitable. Among the benefits realized were and was stability in the structure of military pay and increased morale. improved AUSTRALIA In 1970 the Committee of Inquiry was appointed to examine the military compensation system. The Committee was to establish principles and concepts for determining mili- tary pay levels and to review the practical working cf the pay system, the nature of the special demands of service life, the practicality of a number of existing and other aspects relating to terms and allowances, conditions of em- ployment. In formulating its recommendations, the Committee was to take into consideration the national requirement to attract and retain men and woman for service in the armed forces and was to have as an objective that compensation of members of the regular armed forces should be readily com- prehensible and its nature fully identifiable. During its work the Committee found that service mem- bers generally believed that higher pay could be obtained by working in civilian employmert. Service members also crit- icized the pay and allowances system. Their criticisms included: -- Inequities between the pay of single and married members were built into the pay system. -- Service members did not understand what pay elements were included in their compensation, the relation- ship between military and civilian pay rates, and how their pay was adjusted. In 1971 the Comrniittee of Inquiry recommended that, be- cause of the current military pay system's inherent defects and inconsistencies, it was incapable of satisfactory fication and should be abandoned. The Committee modi- also recom- mended the following principles for the military compensation system: 9 -- There shall be objectivity and impartiality in coin- pensation decisions and administration. -- There shall be an appropriate balance struck between internal and external equity. -- There shall be rational internal and external pay relationships. -- Military pay shall be expressed with maximum visi- bility and understandability. As the Committee's reports became available, its recom- mendations were implemented. In 1971 enlisted member pay was alined with pay for the same level of work in the Aus- tralian public service, officer pay was alined with pay of professional grades of the public service, and general of- ficer pay was alined with that of the heads of governmental departments. In early 1973 military pay was expressed in annual terms, as a fully taxable salary. This action com- pleted the conversion of the Australian military compensation system from a pay and allowances system to a salary system. In assessing the benefits of the military salary sys- tem, an Australian compensation fficial stated that transi- tion to salary eliminated many of the problems of the pay and allowances system. The salary system improved the serv- iceman's understanding of his pay, permitted him to relate his annual salary to that of persons in the Australian public service and industry, and eliminated the marriage allowance which had created a pay inequity between married and single members. He further stated that an intangible benefit of the new salary system was the degree of stability it brought to the structure of military pay. He believed that this stability would make attraction and retention programs mre effective. CANADA In 1965 the Canadian Treasury Board and the Ministry of National Defense created the Working Group to review the Canadian military pay and allowances structure. This Working Group was charged with the responsibility for developing the philosophy and principles necessary to es- tablish and maintain a military pay structure and for ap- plying the approved philosophy to an examination of the existing military compensation system. 10 In developing its philosophy and principles for mili- tary compensation, the Working roup proposed that the Cana- dian military pay system -- provide a level of pay which would attract and retain career-motivated individuals with the skills necessary to meet the requirements of a military organization and be equitable, considering factors of military service, with pay levels available in te civilian environment; -- insure that service members enjoy a standard of liv- ing equal to that of their civilian contemporaries; -- be designed to permit timely and equitable pay ad- justments to compensate for changes in the national economy; -- encourage a high level of performance and provide the incentive for servicemen to advance; -- give full recognition to the conditions of service unique to the military; --provide a system of remuneration for cc.tinuous or periodic exposure to special conditions of service involving abnormal hazard, responsibility, and unusual environment. During its review, the Working Group encountered complaints of members that reflected the shortcomings major of the pay system. Members stated that the military compensa- tion system (1) discriminated against single members by paying married members more for performing the same level of work, (2) created differences in pay between married mem- bers living on the civilian economy and those occupying Government quarters, and (3) paid service members in profes- sional positions less than salaries paid for similar in industry and the civil service. work The Working Group con- cluded that the old system of pay was too confusing tary personnel to understand and for the Defense for mili- Ministry to administer. The Working Group's findings and recommendations presented to a Senior Steering Committee were within the Ministry of National Defense in mid-1966 and were subsequently divided into two categories: (1) those which could be resolved by the periodic pay review date of October 1, 1966, ard (2) those requiring further study. The recommendations that could be 11 implemented in the short term were (1) combining the marriage allowance and subsistence allowance in a single pay for rank (salary), (2) instituting a system of charges for married and single members' quarters, and (3) making increments of pay based on time in rank conditional upon achievement of performance standards. These recommendations, together with some minor changes, were approved, and conversion to salary was made in 1966. In 1968, the joint Treasury Board/Department of National Defense Advisory Group n Military ompensation was formed to recommend changes to achieve clmpensation parity between the military and the public service. The Advisory Group found that public service pay was about 2P -ent higher than mili-. tary pay. Because this difference o large, Canada took 2 years to achieve comparability between the military and the public service. The first increase occurred in October 1970, and the second occurred in October 1971. Canadian compensation officials believed that the new salary system increased the visibility of pay and removed many of the inequities of the previous pay nd allowances system. For example, the gap in pay between married and single members was closed by eliminating the marriage allow- ance. The salary system also helpd simplify the administra- tion of pay records. Further, military pay and pay in the public service were essentially equalized. Although unable to quantify the benefits of conversion to a military salary system, Canadian officials believed it provided some assurance that the services would be better equipped to compete for the required personnel. UNITED KINGDOM In 1967 the Secretary of State for Economic Affairs, the Chancellor of the Exchequer, and the Secretary of State for Defense instructed the National Board for Prices and In- comes to undertake a continuous review of he pay and allow- ances system of the armed forces. In 1969 the board reported to the Prime Minister that it would be increasingly difficult to meet the armed forces' manpower needs in the 1970s because the number of mei in are primary recruiting ages was declin- ing, the portion of this age group that remained in school was rising, and te number of men going into civilian ap- prenticeship programs was rising. 12 The board recommended the adoption of a military salary system because the defects inherent in the old pay and al- lowances system might prevent the military manpower requirements. from meeting ts These defects follow. -- Both single and married personnel viewed the differ- ences in compensation based on marital status as outdated. The board noted that civilian pay did distinguish between married and single not members and that was the function of the income tax. -- It was reasoned that this attitude would be shared by potential recruits, the large majority single. of whom were The system was viewed as a disincentive enlistment because it provided the lowest to compensation to single members whom he services were most anxious to attract. -- The existing system was complicated, so that military compensation was difficult to convey to potential re- c u its. -- The sdme complexity made it difficult for service members to evaluate their compensation. The armed forces agreed with the conclusions and a salary system was approved. of the bard, Preparatory work included (1) devising ods of job evaluation for comparisons and proving meth- with work in civilian industry, (2) determining systems for applying charges for quarters and food, (3) considering the effect of the military salary philosophy on compensatory allowances (4) revising regulations governing pay, and pensions, pensions, and allow- ances, (5) assessing short- and long-term ing a military salary, and (6) considering costs of introduc- procedures and methods to provide regular the adoption of adjustments of the elements comprising military salary. The salary system, with salaries generally reflecting private sector pay rates, was installed in April 1970, e- cept that the pay increase for single men (needed tc bring their total pay into line with that of married men) as implemented in two parts, the first part being implemented on April 1, 1970, and the remainder on April 1, 1971. In evaluating the benfits of a salary Kingdom military conmpensation officials ystem, United said that the new 13 military pay system developed confidence among service mem- bers that their pay was equitable and that, under normal conditions, their salaries would keep pace with civilian salaries. They further believed that the visibility salaries afforded compensation would enhance attraction and retention programs. The chart on the following page summarizes the conver- sion experience of the three countries. 14 I~"4-L -i ~~~~~~ 4U),J vl 4- a,~~~~~~~~~ 0) CV 4~ cl .'r2 "o V ~. 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CHAPTER 4 METHODS OF CONVERTING TO A SALARY SYSTEM Convr'-ting to a salary system entails numerous considera- tions, including -- the initial salary levels for military personnel, -- the appropriate charges for Government-provided hous- ing and meals, -- the reexpression of other compensation elements which are currently computed based on the value of an ele- ment of RMC, --the method of periodically adjusting military salaries in the future, and --the effect of salary limitations on flaq and general officer pay. The first two considerations are addressed in this chapter. and the others are discussed in later chapters. The major consideration in converting to a salary sys- tem, in our opinion, is the determination of initial salaries for military personnel. Two methods of determining military salary levels have been considered in previous pay studies. -- Developing salaries based on the pay of a designated segment of civilian employees. -- Developing salaries based on current levels of RMC. The two methods are discussed in the following sections. SALARIES BASED ON PAY OF A DESIGNATED SEGMENT OF CIVILIAN EMPLOYEES Pay rates for the majority of Federal civilian employees are goverened through the principle of comparability with pri- vate enterprise pay for equivalent levels of work. Military pay rates, on the other hand, are not goverened .y an external measure f appropriateness--ray standard--although annual in- creases in the cash elements of RMC (basic pay and the cash quarters and subsistence allowances) are currently indexed to the average annual increase in General Schedule Pay. 36 To determine military pay levels based on an external pay standard, it would be ncessary to establish segment of civilian employees whose ay levels (1) the the basis for military pay levels and (2) a to form the mechanics of the assessment process, that is, the appropriate for collection and aggregation of data and procedures for the transla- tion of civilian pay data to the military pay structure. In 1967 the First Quadrennial Review of Military Com- pensation recommended determining military pay levels by linking the pay of military grades to equivalent (work levels) in Federal civilian systems, grades since military pay rates based on the Federal civilian rates would also Le comparable with private sector rates. A second possible approach is to link military pay rectly to the di- pay of some segment or non-Federal employees. This approach would probably involve the design of a periodic survey of pay for equivalent levels of work in the non-Federal sector. Developing the mechanics of the assessment process in- volves resolving numerous questions, some of which follow. -- If the standard selected for military pay is the Day of non-Federal employees, from which industries establishments and for which jobs and work and levels should the pay data be collected? -- If the standard selected for military pay is Federal civilian pay, what are the appropriate relationships between Federal civilian pay grades and military pay grades? -- In comparing civilian and military pay data, how should differences between military and civilian employment conditions, such as overtime, hazard, and transient life, be treated? discipline, Also, how should the differences in pay practices, such as use of bonuses and special pays, be treated? -- How much judgment should be permitted in translating civilian pay data to the military pay structure, how should it be exercised, and by whom? Merits of the method The First Quadrennial Review felt that the vantage of determining military pay levels major ad- on a pay standard method was that it would assure both managers and members 17 that military pay was set and maintained on a par with pay in other employment, thus developing confidence in the sys- tem's stability and fairness. We agree that the standard method would probably instill confidence in the system's stability. However, military serv- ice differs from civilian employment in many respects, in- cluding subjection o the military disciplinary system and the requirement for relocation as the needs of the service dictate. These negative aspects of military service may dis- suade individuals from military service, even though military pay is comparable to civilian pay. On he other hand, military service has positive aspects. An example is training and education programs, many of which provide vocational, technical, and professional training ap- plicable to both military and civilian employment. The value of positive aspects may attract individuals to military serv- ice, even in the absence of comparable pay levels. Further, these positive and negative aspects may balance differently at different career stages. For example, train- ing opportunities in the early years of service may outweigh the negative aspects of military service, but in later years family relocations and separations may outweigh positive as- pects. We believe that the relationship between current mili- tary pay levels and those which would result from a pay standard requires careful consideration. DOD officials have stated that current military pay is generally sufficient to enable the services to attract and retain the desired quantity and quality of personnel. If the pay levels pro- duced through application of a standard are higher than cur- rent levels, it follows that the Government would be paying more than is necessary for military personnel. If they are lower, recruiting and retention programs may be adversely affected. REEXPRESS CURRENT LEVELS OF RMC INTO A SALARY This method of converting involves incorporating the elements currently comprising RMC into a fully taxable salary. Therefore military salaries based on RMC are simply a reex- pression of current pay levels. In 1976 the Defense Manpower Commission recommended the RMC method of conversion. As was pointed out earlier, members of the same crade and length of service receive different amounts of RMC. The following table illustrates this point. 18 RMC for Grade E-5 Personnel With 8 Years' Service (note a) Receiving cash Residing in Government quarters allowances quarters (note b) Fami y FamiyI Fai Fam iy Family size 1 size 2 size 3 size 1 size 2 size 3 Basic pay $7,168 $ 7,168 $ 7,168 $7,168 , 7,168 $7,168 Quarters 1,231 1,843 1,843 288 BAS (note c) 2,820 2,820 923 323 923 923 923 923 Federal income tax advantage (note d) 634 643 625 336 887 854 RMC $9,956 $10,577 $10,559 $8,715 $11,798 $11,765 Average RMC $10,562 a/Basic pay and cash allowance rates were those effective Oct. 1, 1975. b/These quarters rates are based on the estimated cost of Government quarters. (See app. I, columns 3 and 4 and foot- note b.) c/The cash subsistence allowance has been used in all cases because estimates of cost to the Government and fair market value rates were not available. d/The standard deduction was used in calculating tax advan- tage. Under the RMC method of conversion, it would therefore be necessary to establish a procedure for selecting the single amount to be paid to all members of the same grade of service. and length For example, one procedure is to average members' RMCs. It is important to emphasize that RMC omits portions military compensation for some specialties which of would nor- mally be included in civilian salaries. For example, mili- tary physicians receive special pay in addition to their RMC. The special pay is designed to provide a total age which will be sufficient, relative to civilian pay pack- earnings opportunities, to attract and retain physicians military. for the Such bonuses and special pays would be retained under the RMC method of conversion. 19 Merits of the method Since the RMC method of conversion involves only a re- expression of pay, no major change in pay levels need result. However, it is possible t.iat current pay levels are unneces- sarily high, particularly in view of the fact that military pay, even though it lacks visibility, is currently sufficient to support most attraction and retention programs. The RMC method of conversion should, in our opinion, be less time consuming than waiting to establish an accept- able pay standard and then converting. Consequently, the benefits of visibility and equity could be achieved more quickly under the RMC method. COST TO CONVERT TO SAL.ARY--RMC METHOD When we made our review, there was no current data available on the cost to convert using a pay standard. How- ever, conversion costs for the RMC method had been recently estimated by LOD. These estimates represent the addit.onal ccsts to )D and the Federal Government. (See p. 26. To esLmate conversion costs, it is necessary to estab- lish a procedure for constructing salaries and to determine charges for Government-provided food and housing. Constructing salaries As was pointed out earlier, since members of the same grade and length of service receive different amounts of RMC, the RMC method of conversion requires a procedure for selecting a single amount to be paid to all members in the same pay cell. 1/ Since single members generally receive lower RMC than do married members, and since one of the conversion bjec- tives is to equalize pay for married and single members, one procedure is to construct salaries based on the higher RMC received by married members. Thus the effect of this procedure is to provide essentially the same pay for married members as they receive under the base pay and allowances system and to increase single members' pay to that level. 1/The term "pay cell" means a particular grade and/or length of service combination, for example, grade E-5 personnel with 8 years' service. 20 A second procedure is to compute as salary the average RMC of members in the pay cell. For those members residing in Government quarters and those provided meals as a part of their RMC, there ae several ways to quantify these items. -- Set their value at the amount of the cash allowances, since these are the amounts withheld from members receiving Government housing and subsistence. -- Estimate their value at the cost to the Government for providina the items. This is the method normally used for valuing military quarters. --Estiimate their value based on the cost for similar items in the civilian community. This is called a fair market rental approach and is used for valuing nonmilitary Government housing. The values placed on housing and subsistence provided by the Government will differ under these approaches. For example, the value of Government quarters for a single, grade E-5 member using the cash allowance rate would be $],231 but valued at $288 if valued at cost to the Govern- ment. (Fair market rental rates were not available.) Whatever method is used for quantifying quarters and subsistence provided by the Government, the effect of bas- ing salary on the average RMC of members in the pay cell is to redistribute pay among the members in the cell. For example, consider the following information for grade E-5s with 8 years' service. (See p. 19.) RMC Receivino cash quarters allowances: Family size 1 $ 9,956 Family size 2 10,577 Family size 3 10,559 Residing in Government quarters: Family size 1 8,715 Family size 2 11,798 Family size 3 11,765 Average $10,562 The average RMC is $10,562. Some of these members would therefore receive less and some wculd rece ve more than under the current system. 21 Establishing charges for Government- rovlied housin - and mea s The Government provides housing each year for about 310,000 military families and 800,000 single members, and about 820,000 enlisted members are entitled to Government- provided meals. The value of these items is considered a part of members' pay. However, as was there are several ways to quantify thesepointed out previously, items as an element of pay. Under a salary system, charges for these items and a procedure for adjusting the charges would be established. Under the base pay and allowances system, the member residing in Government quarters is implicity paying rent for those quarters in the amount of the cash quarters al- lowance he does not receive. If similar quarters in the private community cost more than that amount, the member occupying Government quarters enjoys a monetary advantage over the member who is not provided Government housing and must obtain quarters in the civilian community at greater cost than the cash quarters allowance. Conversely, lar quarters in the civilian community cost less if simi- than the allowance, the member residing in the civilian community enjoys the advantage. Under a salary system, charges based on cash quarters allowances would perpetuate inequities between members occupy- ing Government quarters and those resi(d.ng in the community. civilian Charges based on cost to the Government may also perpetuate such inequities. Charges based on fair market rental rates (see p. 21) would reduce these inequities. Similar conditions and problems also exist for BAS. All officers and most married enlisted members receive a nontaxable cash allowance, while most single members entitled to Government-provided meals. An appropriateare charge for Government-provided meals will have to be determined. CONVERSION EFFECT ON THE DOD BUDGET Converting RMC to a salary will increase the DOD budget for several reasons. First, the reexpression of RMC as a fully taxable salary requires monetizing the Federal in- come tax advantage. Since the tax advantage is not re- flected in the DOD budget, monetizing the tax advantage will 22 increase the DOD budget. But it will also increase Federal income tax revenues. 1/ The nontaxable quarters and subsistence portions of RMC produce additional tax advantages because they are not subject to State and local income taxes or to Social Security taxes. These additional tax advantages are not recognized as part of RMC. However, conversion to salary will increase members' State and local, as well as Federal, income tax liabilities and Social Security tax liabilities. If State and local tax advantages were monetized, this would cause an increase in the DOD budget which would not be recovered by the Federal Government but would be transferred to the States through increased State and local income tax collections. Monetizing Social Security tax advantages would also increase the DOD budget, but this increase would be returned to the Federal Government through increased Federal Insurance Contributions Act (FICA) collections. The services' participation in the Social Security pro- gram will produce another increase in the DOD budget upon conversion to salary. Social Security taxes are levied in equal amounts on the member and DOD. Thus DOD's share of FICA taxes will also increase. / However, this increase in the DOD budget will also be recovered by the Federal Covernment through increased FICA collections. Social Security program operates essentially on Since the a pay-es- you-go basis, the additional Social Security benefits pay- able to military members as a result of higher covered earnings would be financed through future FICA receipts. Military members now receive gratuitous Social Security wage credits of up to $300 each calendar quarter if their l/Since the tax advantage depends on numerous factors other than military pay, we would not expect that the Treasury will recover the exact amount. 2/The Social Security taxable earnings ceiling for 1975 was $14,100; for 1976, $15,300; and for 1977, $16,500. For those members receiving more in basic pay than the taxable earnings ceiling, conversion to salary would pro- duce no additional Social Security tax liability for the member or DOD. However, basic pay of most enlisted mem- bers and junior officers is below the taxable earnings ceiling. Therefore these members and DOD would be subject to additional Social Security taxes upon conversion. 23 basic pay is below the taxable earnings ceiling. Social Se- curity benefits arising from these credits are financed from general revenues. The rationale for providing the credits was that basic pay is a smaller portion of total pay for military members than salary is for the civilian. This means that military members are provided additional covered earn- ings credits because the allowances are nontaxable. These credits should be eliminated upon conversion to a salary system. Some members may suffer a reduction in take-home pay as a result of con' ersion to a salary system. Other members, particularly single members, would receive increases in pay. (See p. 21.) Those members whose take-home pay would be reduced as a result of conversion could be protected hrough enactment of saved pay provisions. Such provisions would authorize payment of the difference between current take-home pay and that which would be received upon conversion. Saved pay costs would increase the DOD and the Government budgets. However, these costs would be nonrecurring. They would eventually be eliminated through general pay increases, longevity increases, and promotion increases. Estimated conversion costs under several alternatives 1/ The four conversion alternatives and associated costs presented on pages 25 and 26 were developed as part of an house DOD effort. When we made our review, these were th, only recent estimates available to us. DOD said that the preliminary estimates did not attempt to assess methods of implementing a salary system, which could have a major im- pact on whether any substantial additional costs would be incurred as a result of conversion. For example, instead of a general pay increase for all military members in Octo- ber 1977, single members pay could be increased to equal that of married members. In this case, the cost of the salary system may be less than the cost of retaining the base pay and allowances ystem and providng a general pay increase. However, the OD cost estimates do not con- sider such a strategy. The estimates consider only an "instantaneous conver- sion cost," without taking into account other pay actions l/Base pay and allowance rates used were those in effect in October 1975. 24 which would affect the relative costs of the two pay sys- tems. For example, assuming that salaries for each pay cell are based on the average RMC of members in each cell, the total cost to the Government (ignoring saved pay) main about the same as the cost of the base pay andwould re- allow- ances system at the time of conversion. Saved pay would then increase the cost of the salary system relative to the cost of the base pay and allowances system. This instan- taneous cost (on an anniualized basis) is the conversion cost estimate prepared by DOD. (See alternative 4 below.) When conversion to salary is considered in combination with a general pay increase, the additional cost of the salary system may be decreased, since a portion of the gen- eral pay increase would be offset by reductions in saved p.y costs. The measure of conversion cost is then the difference between the estima'ted costs of the two systems after the general pay increase. Thus the estimate presented nay overstate conversion costs. Conversion alternatives The four alternatives presented below differ with re- spect to the construction of salaries for each pay cell and the "rent" to be charged for Government quarters. Under all alternatives, members on sea duty would not be charged for quarters aboard ship. Subsistence rates included in salaries and subsistence charges are based on officers' and enlisted members' (BAS) rates under all alternatives. Alternative -- Salaries for each pay cell incorporate the with-dependent BAQ rate. (See app. I.) Members with dependents residing in Government quarters would be charged rent equal to the wizh-dependent BAQ rate. Single members residing in Government quarters would be charged one-half that rate. Alternative 2--Salaries are constructed in the same manner as under alternative 1. Charges for Government hous- ing would equal the cost of Government quarters as shown in app. I. Alternative 3--Married members' RMCs are estimated using with-ependnt AQ rates. Single members' RMCs are estimated using without-dependent BAQ rates. Salaries for each pay cell are then constructed as the average RMC of members in the cell. Charges for Government quarters equal the cost of the quarters. 25 Alcernative 4--Members' RMCs are estimated using BAQ rates for those members receiving BAQ, and the Government's cost of quarters for those members residing in Government quarters. Salaries for each pay cell equal the average RMC of members in the cell. Charges for Government cquarters equal the cost of the quarters. We emphasize that these alternatives are not the only approaches nor necessarily the best. We believe that al- ternatives incorporating the fair market rental concept (see p. 21) should also be explored. Estimated conversion costs for the four alteratives are presented in the following table. The DOD columns show the estimated increase in the DOD budget, and the Govern- ment columns show the net cost to the Government. Estimated Conversion Costs (note a) Alternative 1 Alternative 2 Alternative 3 Alternative 4 Govern- Govern- Govern- Goverit- DOD ment DOD ment DOD ment DOD ment (millions) Monetize Federal Income tax and advantage (note b) $1,420 $ - $1,420 $ - $1.290 $ - $1.230 $ - FICA (em- ployer's share) 345 - 345 - 310 - 285 - Increased take- home pay (notes c and d) 765 765 740 740 280 280 45 45 Saved pay (notes d and e) 145 145 440 440 625 625 655 655 Total $2.675 $910 $2,945 S1.180 $2,505 $905 $2.215 $700 a/The estimates were developed by a DOD in-house effort. Base pay and allowance rates used were those in effect in October 1975. Cost estimates rounded to nearest 5. b/State nd local income tax advantages and Social Security tax advantages were not monetized. c/Consists mainly of increases for single members. d/The effects of State and local income taxes were not considered in comparing take-home pay under the current system and the salary alternatives. FICA taxes, however, were considered. e/Saved pay is a nonrecurring cost. It would eventually be eliminated through promotions, longevity increases, and general pay increases. 26 CHAPTER 5 OTHER ISSUES TO BE CONSIDERED In converting to a salary system, the following should also be carefully considered. issues --The reexpression of other compensation elements which are currently computed based on the value of an ele- ment of RMC. -- The nethod of adjusting military salaries in the fu re. -- The effect of salary limitations on flag and general officer pay. REEXPRESSION OF OTHER COMPENSATION ITEMS Converting to a salary system will affect elements of RMC but many other pay elements not only the as well. These items are commonly referred to as drag alongs because they are computed as a multiple or fraction of and thus change automatically whenever the an element of RMC RMC element changes. Appendix II presents a list of drag-along items and the RMC elements to which they are linked. On converting to a salary system (by reexpressing a salary or converting to salary using RMC as a pay standard), RMC elements will lose their identity, which will require changes in drag-along computation formulas even if the level of the drag along is to remain the same as at present. For example, the most significant drag-along item is retired pay, which is computed as a fraction of basic pay. The formula for computing retired pay is terminal basic pay times years of service times 2.5 percent (multiplier), to a maxi- mum of 75 percent of basic pay. If salary is substituted for basic pay in the retired pay formula, higher retired pay than at present would result unless the formula is re- vised, uch as lowering the multiplier. The following table il 1 :,otrates this point by comparing retired pay (1) under t' present system, (2) under a salary system if the multi- p 3r is not changed, and (3) to achieve about the same re- tired pay as under the base pay and allowances system. 27 Maintain same retired P qi- grades rsystem 'yrstl Salarysystem ___ p ay asese nt Pay rades Base Total Bse at 20 years' amount multiplier Retired amount Total Petired Heu Ired Retired Service (notea) (noteb) pay (note c) mult ipler pay multiplier pa 0-4 $19,865 50 S$9,933 $24.728 50i S12. 64 40.2'% S 9.933 0-5 22,950 50 11.475 28.447 50 14,224 40.3 11.475 0-6 25,373 ,0 12,687 31.489 5d 15 745 4].3 12.685 E-7 10.541 50 5,271 14.285 50 7.143 36.9 5.271 :-8 11.948 50 5.974 15.862 50 7.931 37.7 5.974 E-9 13.630 50 6,b1 17,860 50 8,930 18.2 6.815 a,'Annual bdsic pay as of Occt. 1, 1975. 0D20 (years of service) tlimeF i.5 percent. c/The salaries used in ts table are annual salaries roduced by alternative 1 of c!. 4. d,l'ercentaqes rounded to nearest tenth. The above table illustrates another concern in the re- tired pay formula. if RMC is reexpressed as salary and re- tired pay levels are to remain the same as at present, en- listed members would receive a smaller portion of salary as retired pay than would officers. This occurs because basic pay comprises a smaller portion of enlisted members' RMC than of officers. Th difference should be eliminated under a salary system. Therefore. converting to a salary system will require a careful analysis of the retired pay formula to in- sure that an equitable and efficient change is adopted. A similar analysis of other drag-along items should also e performed. For some of these drag-along items, such as reenlistment bonuses and continuation pay, consideration should be given to reexpressing them as flat amounts rather than linking them to other pay elements. There is no rea- son, for example, that continuation pay should increase auto- matically whenever basic pay (or salary) increases, particu- larly if attraction and retention goals are being met with the lesser amounts. In our opinion, no major costs resulting from drag alongs should be allowed to occur upon conversion to a salary sys- tem,. METHOD OF ADJUSTING MILITARY SALARIES The annual adjustment of RMC is goverened by 37 U.S.C. 1009, as amended, which requires that military pay be in- creased by the average percentage increase granted General Schedule employees. The increase in military pay may be allocated in one of two ways. -- The cash elements of RMC (basic pay, BAQ, and BAS) mav each be increased by the verage General Schedule increase (the equal percentage method). 28 -- The President may reallocate up to 25 percent of the amount allocated to basic pay under the equal percent- age method to the quarters and subsistence portions of RMC. The second approach particularly can and does cause mili- tary members to receive different increases in RMC. For ex- ample, the pay raise effective October 1, 1976, was an aver- age increase cf 4.83 percent for General Schedule employees. However, when trcsizlated to the military under the second approach, R increases ranged from about 4.5 percent to 7.2 percent. Under a salary system, indexing increases in military pay (salary) to the average increase in General Schedule pay means that military salary increases would always be across- the-board increases; that is, all military grades would ceive the same percentage increase. The indeying method re- would not recognize that, over time, jobs within an organiza- tion and economic factors affecting pay, such as the avail- able supply of people with necessary skills, tend to change. Also, requiring application of the same percentage increase to all military grades provides no flexibility in directing larger ortions of pay increase resources to areas where attraction and retention problems are the most severe. Thus the method would not insure that compensation resources distributed in the most efficient manner for supporting are at- traction and retention programs. Alternatives to the in- dexing method which allow flexibility in the application of pay increase resources should be explored. EFFECT OF SALARY LIMITATIONS ON FLAG AND GENERAL OFFICER PAY By lw (5 U.S.C. 5308,37 U.S.C. 1009), salaries for level V of the Executive Schedule set a ceiling on pay under most other Federal pay systems, including the uniformed services. This ceiling is applied to salaries in most of the systems, but in the uniformed services, it is applied to basic pay. The current pay ceiling is $47,500. Converting to a military salary system would mean that the entire salary, rather than basic pay alone, will become subject to the pay ceiling. Most members in the 0-8 to 0-10 pay grades and the Chiefs of Saff currently receive RMC totaling more than the ceiling and would therefore suffer a reduction in pay by the amount that the new salary exceeds the ceiling, as shown below. 29 Potential Pay grade after Number Annual Annual annual 26 years' of basic RMC loss at service personnel y (note a) conversion Chiefs of Staff 5 b/$47,500 $57,723 $10,223 0-10 31 b/47,500 57,727 10,227 0-9 124 43,805 53,741 6,241 0-8 420 39,492 48,874 1,374 a/These figui s assume FY 1977 cash allowances, BAQ and BAS. b/Basic pay amounts received as of Mar. 1, 1977, subject to the pas ceiling. If there were no ceiling, Chiefs of Staff nd 0-10s would receive basic pay of $54,781 and $49,648, respectively. Saved pay could be used to insure that the members af- fected do not suffer pay reductions at the time of conversion. However, these members would receive no further pay increases until their salaries are overtaken by the ceiling. 1/ As can be seen from the magnitude of the differences between RMC and the pay ceiling, it would probably be from 1 to 4 years before members in these positions receive any increase, as- sum-ng a 6.5 percent annual pay adjustment. This is the per- centage in the 1978 budget for Federal employee pay raises. l/The adjustment of Executive Schedule salaries is governed by two provisions of law. The first is Sec. 225 of the Federal Salary Act of 1967 (Title 2, Public Law 90-206, 81 Stat. 642), which provides for a quadrennial review of Execu- tive Schedule salaries and a process for their adjustment. The second is Public Law 94-82, which added 5 U.S.C. 5318 to provide that Executive Schedule salaries be increased annually by the average percentage increase granted General Schedule employees. 30 CHAPTER 6 CONCLUSIONS, AGENCY COMMENTS, AND RECOMMENDATIONS CONCLUSIONS The objective of military pay has changed from providing a reasonable standard of living at a minimum cost to the Gov- ernment to providing pay that allows the services to success- fully compete with other employers for the quantity and qual- ity of military personnel required. However, the pay and allowances structure as been retained even though eminent study groups and commissions have repeatedly pointed out that it is inefficient in supporting this objective and have rec- ommended conversion to a salary system. We believe that salary is a better way to express mili- tary pay for the following reasons. -- Under the current system, members, managers, and tne Congress have difficulty in accurately quantifying and evaluating military pay. Much of this difficulty stems from the "invisible" nature of compensation elements, such as Government-provided quarters and subsistence and particularly the tax advantage. A fully taxable salary should (1) increase members' awareness of their pay, (2) improve management prac- tices and the efficiency of attraction and retention programs, and (3) place both the Congress and DOD in a better positioi to evaluate the military com- pensation system. -- A salary system would eliminate inequities in pay, RMC, between married and single members of the same grade and length of service. --A salary system would more fully reflect the cost of military manpower rather than partially conceal- ing t, through tax advantage, in reduced revenues to cne Treasury. AGENCY COMMENTS AND OUR EVALUATION Advance comments from DOD requested on December 29, 1976, were not received. But DOD's position on the salary recom- mendation made by the Defense Manpower Comnmission was that the disadvantages of a salary system outweighed the advantages. The disadvantages cited follow. 31 1. Ir terms of total compensation, a salary system is not more able to meet its "equal pay for equal work" objective than is the pays and allowances system. 2. A salary system that does not reduce the take-home pay o2 service members will be somewhat more costly to the Government in time of war and to DOD even in peacetime. 3. A salary system will increase the size of the man- power portion of the DOD budget. 4. The military departments object to a salary system on the grounds that it is one more step in the pro- gressive "civilianization" of the Armed Forces. It will not reinforce military customs, tradition, and way of life but will detract from them. The Office of Management and Budget (OMB) said that changes in the expression of military pay, if necessary, should be accomplished in conjunction with changes in mili- tary pay levels. It believed that current RMC levels might not be "appropriate" pay levels for the military, and sub- sequent adoption (,f a pay standard would subject the mem- bers to more than one pay change. Regarding DOD's first disadvantage, we recognize that a salary system will not result in members' receiving the same total compensation. But it will reduce the discrepan- cies of RMC by paying the same salary to all members of the same grade and length of service. By reducing the in- equities in the base pay and allowances system, there will also be a reduction in the inequities in total compensation. We do not know if a salary system would be more costly to the Government in time of war. We note, however, that DOD's apparent belief is that an inefficient and inequit- able system, and possibly a costly one (see pp. 6 and 7) should be retained in peacetime so that the apparent cost of war might be less. The third disadvantage cited is that a salary system will increase the manpower portion of the DOD budget. Although this is true, we believe it is a distinct advantage. It must be emphasized that the DOD budget does not Hiow reflect the cost of military manpower. For example, the tax advan- tage element of RMC is not recorded in the DOD budget but is a co-t to the GovernmenL in the form of reduced tax rev- enues. 'flecting the tax advantage in the DOD budget does 32 not increase the cost of military manpower; it merely records the cost more fully in the appropriate agency budget. Thus monetizing tax advantage (and reflecting it in the DOD budget) does not represent an additional allocation of resources to DOD or an increase in the real cost to the Government for maintaining the same level of national defense. It simply, requires more accurate accounting of the current cost, rather than partially concealing it in reduced revenues to the Treas- ury. We believe DOD should fully report all of its compen- sation costs, and then the DOD budget can be recognized by the Congress, the member, and the taxpayer. The fourth disadvantage cited was that a salary system is a step in the progressive "civilianization" of the Armed Forces and will detract from military customs, traditions, and way of life. OMB and DOD officials have stated that the services believe this would adversely affect combat effec- tiveness. It must be remembered that the military competes for personnel with civilian employers. The increased visibility and equity of military pay associated with a salary system, in our opinion, can only aid in obtaining the personnel re- quired by the services. It is true that a salary system is a departure from the traditional method of paying military personnel. However, we fail tr see the connection between combat effectiveness and the expression of military pay. It appears to us that combat effectiveness is related more to the quality of mili- tary leadership and dedication to duty than to whether pay is expressed in several different elements, RMC, or in one salary. OMB officials noted that the act of change itself is a disadvantage. The act of change may be somewhat disrup- tive, but the impact can be minimized. Before any change, the members should be properly told of the need for change, method of change, and how the change will affect the mem- bers. The current inefficient and inequitable compensation system appears to be a much greater disadvantage than the conversion to a salary system. OMB believes that a salary system should not be im- plemented without adopting a pay standard; that is, all changes to pay levels should be made at the same time. This may be an ideal concept, but the issue has been dis- cussed many times over the past decade with little or no action taken. If a salary system is to be adopted based on 33 a suita e pay standard, we suggest that milestones be es- tablisheJ for an expedient conversion. If this cannot be accomplished, we suggest that salary conversion be made based on RMC. Also the RMC method may be a better approach to con- verting the military to a salary system than usin a pay standard method. Visibility and equity of milita y pay could probably be achieved more quickly under the RMC method, and, since pay levels would remain essentially the same as the present, there should be no adverse effects with respect to attraction and retention of military personnel. In fact, retention and attraction programs should improve. However, since current pay levels may be higher or lower than necessary, we consider the RMC conversion only an ini- tial step. An examination of the effects of an RMC conver- sion should provide an indication of what additional changes in military pay, if any, are desirable and should place both the Congress and DOD in a better position Lu evaluate the military compensation system. RECOMMENDATIONS TO THE CONGRESS We recommend that: --The military base pay and allowances system be re- placed by a salary system. -- The executive branch be irected to draft and submit conversion proposals and establish milestones for converting the base pay and allowances to a salary system. 34 APPENDIX I APPENDIX I BAQ RATES AND ESTIMATED COST OF GOVERMENT QUARTERS (ANNUAL RATES) Estimated cost of Government BAQ-rate (note a) quarters (note b) Pay Without With '- Without Wit grade dependents dependents dependents dependents 0-10 $3,063.60 $3,830.40 $1,500.00 $4,380.00 0- 9 3,063.60 3,830.40 1,50U.00 4,380.00 0- 8 3,063.60 3,830.40 1,500.00 4,380.00 0- 7 3,063.60 3,830.40 1,500.00 4,380.00 0- 6 2,815.20 3,434.40 926.40 4.380.00 0- 5 2,635.20 3,175.20 926.40 3,900.00 0- 4 2,376.00 2,865.60 926.40 3,900.00 0- 3 2,106.00 2,599.20 926.40 2,940.00 0- 2 1,843.20 2,336.40 759.60 2,640.00 0- 1 1,447.20 1,882.80 759.60 2,544.00 W- 4 2,293.20 2,764.80 759.60 3,300.00 W- 3 2,066.40 2,548.80 759.60 3,300.00 W- 2 1,821.60 2,311.20 759.60 3,300.00 W- 1 1,648.80 2,138.40 759.60 3,300.00 E- 9 1,738.80 2,448.00 637.20 3,360.00 E- 8 1,620.00 2,289.60 637.20 3,360.00 E- 7 1,389.60 2,145.60 637.20 3,360.00 E- 6 1,274.40 1,994.40 288.00 3,120.00 E- 5 1,231.20 1,843.20 288.00 2,825.00 E- 4 1,083.60 1,612.80 288.00 2,580.00 E- 3 961.20 1,393.20 288.00 2,520.00 E- 2 849.60 1,393.20 288.00 2,460.00 E- 1 799.20 1,393.20 288.00 2,460.00 a/Oct. 1, 1975, rates. b/These estimates are based on FY 1974 data and are not of- ficial. They were developed as part of an in-house effort by DOD. The method used to develop the estimates is con- sistent with methods used in the past for developing rates for Government-provided quarters. 35 APPENDIX II APPENDIX II DRAG ALONGS (note a) Compensation element Linked to (drag along) changes in Retired pay Basic pay Reenlistment bonus Basic pay Continuation pay (dentists and some physicians) Basic pay Death gratuity Basic pay Accrued leave upon separation Basic pay Severance pay Basic pay Readjustment pay Basic pay National Guard and Reserve drill pay Basic pay Government contribution to Social Security Basic pay Pay, allowances, benefits, and retired pay of comissioned personnel of National Oceanic and Atmospheric Administration Same elements for officers and U.S. Public Health Service in the Armed Forces Family separation allowance (type 1) Basic allowance for quarters Dislocation allowance Basic allowance for quarters a/This list of drag alongs may not be inclusive. 36 APPENDIX III APPENDIX III EXECUTIVE OFFICE OF THE PRESIDENT OFFICE OF MANAGEMENT AND BUDGET ;v¢. -' WASHINGTON, D.C. 20503 MAR 8 1977 Mr. Victor L. Lowe, Director General Government Division U. S. General Accounting Office Washington, D.C. 20548 Dear Mr. Lowe: As requested in your letter of December 30, 1976, we have reviewed the GAO draft report "A Salsry System is Needed to Improve the Visibility and Equity of Military Compensation." [See GAO note 1, p. 38.] We [See GAO note 1, p. 38.] recommend that the report be modified to include: -- Identification of the disadvantages of a salary system and an assessment of them in comparison with its benefits (Chapter 4). This analysis is now lacking and is needed to support the report's recommendations. -- Explicit consideration of the impact a salary system will have on the Defense budget in addition to that implicit in the table on page 36. [See GAO note 2, p. 38.] -- Sufficient analysis of relevant factors to support the con- clusion that a salary system based on current levels of RMC is better than one based on a standard (pp. 27). A key component of any pay system is its adjustment process. Your analysis does not consider this factor. Accordingly, its conclusion cannot be considered to have assessed all relevant factors. [See GAO note 1, p. 38.] As you know, a Presidential commission is being established to review the findings of the Third Quadrennial Review of Military Compensation. One of the subjects to be addressed by this commission is a modernized 37 APPENDIX Ill APPENDIX III system of military compensation such as the one this GAO report addresses. We would, therefore, urge you to complete your review and publication process as quickly as possible so that the Presidential commission will have sufficient time to fully con- sider the official views of the Comptroller General on this important subject. Sincerely, David Sitrin Deputy Associate Director for National Security GAO notes: 1. Deleted comments relate to matters which were discussed in te draft report but omitted from this final report. 2. Page number references in the appendix may not correspond to pages of this final report. 38 APPENDIX IV APPENDIX IV DOD POSITION ON THE DEFENSE MANPOWER COMMISSION SALARY RECOMMENDATION Defense Manpower Commission Recommendation - The items currently comprising regular mili- tary compensation should be converted into a fully taxable military salary, and differ- ences in the present regular military com- pensation based upon marital status should be eliminated. DoD Position - The QRMC has studied the desirability of converting the present pays and allowances system into a fully taxable military salary and rejected the salary alternative. A "modernized pays and allowances" system was recommended instead. The salary alterna- tive was rejected mainly for the following reasons: o In terms of total compensation, a salary system is not more able to meet its "equal pay for equal work" objective than is the pays and allowances system. o A salary system that does not reduce the take home pay of service members will be somewhat more costly to the Government in time of war and to the Department of Defense even in peacetime. o A salary system will increase the size of the manpower portion of the Defense Budget. o The Military Departments object to a salary system on the groLnds that it is one more step in the progressive "civilian- ization" of the Armed Forces. It will not reinforce military customs. tradition and way of life but detract frDm them. The Department of Defense considers that the advantages of a salary system are out- weighed by these disadvantages. 39 APPENDIX IV APPENDIX IV The President's Blue Ribbon Commission on Military Compensation will review this issue. Status - Await recommendations by the PresidenL's Blue Ribbon Commission on Military Compensation. 40 APPENDIX V APPENDIX V ASSISTANT SECRETARY OF DEFENSE WASHINGTON. 0 C 20301 MANPOWER, IfLX RESERVE AFFAIRS and Logistics 27 JUN 1977 Mr. H. L. Krieger Director, Federal Personnel and Compensation Division U. S. General Accounting Office Washington, D. C. 20548 Dear Mr. Krieger: This is in reply to your letter to the Secretary of Defense regarding your report dated 29 December 1976, "A Salary System is Needed to Improve the Visibility and Equity of Military Compensation, " OSD Case #4499, FFCD 77-20. The Draft Report describes in some detail many of the advantages and benefits of converting to a salary system for military personnel. There are also some disadvantages associated with such a system. Full assessment of the desirability of converting to a salary system requires a balanced consideration of both the advantages and disadvan- tages to the military personnel system. The Department of Defense believes that both should be presented in a report to the Congress on such an important issue. I would also like to comment on the recommendation of the Draft Report to not establish a pay standard for military pay, but to convert to a salary first, then adjust to appropriate levels later if a standard is decided upon. We are currently facing a significant problem in the perception of the erosion of military benefits. The strategy for con- version to salary which the report proposes would add unnecessarily to this problem oy maximizing the probability of having to reduce salary levels in the second step if the standard chosen resulted in a salary lower than current RMC. The Department of Defense has not yet taken a position on the question of a standard for military pay. But it would oppose the introduction of major compensation system reform in a manner which would unnecessarily increase adverse reactions to it among those directly affected. u, o 41 APPENDIX V APPENDIX Attached are some of the disadvantages of a salary system that repre- sent the kinds of changes that should be made to the Draft Report. The Department of Defense believes that he military compensation system can be made more equitable and make more efficient use of compensation dollars without necessarily increasing costs. In doing so, military compensation reform should not be used as a subterfuge for reducing the take-home pay of military personnel. It is recognized that manpower consumes a large, although diminishing, share of the Defense budget. However, if wve are to maintain necessary military force levels, we must be willing to pay a fair price for that benefit. Military pay sca l es and benefits must be competitive with the private sector if we are to attract and retain the numbers and ypes of people needed. This means that in creating improved military compensation systems we should be fair to the taxpayer by not recommending systems or levels of pay higher than prudent assessment indicates are necessary for the adequate manning of our Armed Forces, and that we must at the same time remain fair to military personnel by not proposing systems or pay levels which would exploit their patriotism and dedication, or their contractual commitment to military service. There are clearly both advantages and disadvantages to both the current form of military compensation and to a salary form of military compen- sation. They are complicated by the disadvantages itself. The Department of Defense has recently of the act of change completed the Third Quadrennial Review of ivilitary Compensation (QRMC), the most extensive study of military pay and benefits ever undertaken. After much study of the relative merits and disadvantages of a salary system, the QRMC has recommended a modernized form of a pay and allowances system as the form of conupensation which will best meet the future needs of a military organization. In another recent major study of military compensation, the Defense Manpower Commission concluded that a' salary form of military compensation was preferable to the current system. The Department of Defense has not yet reached a decision on the salary question. A Presidential Blue Ribbon Commission of distinguished citizens is being formed to examine the studies and analyses of the Third QRMC, the DMC, and certain other studies, and to make 42 APPENDIX V APPENDIX V independent recommendations on future military compensation policy. The Department of Defense will await the recommendations of that Commission before taking a position on changes to the form of military pay. Sincerely, RO!.RT EP.P.IET, JR. Principal Dcuty An.:':a.t ccrctary -- of Defense (MRA&L) Att&c hme nt 43 APPENDIX V APPENDIX V Example of Disadvantages of a_Military Salary System In sonme forms, a salary system could increase the Department of Defense budget, even though there might not be a net cost to the federal government. This concern has ben a major reason why a military salary system has not yet been adopted, despite recommendations to do so by the Inajor study groups cited in the report. This should be included in the discussion of the budgetary aspects of conversion to a salary. Alternatives to an increased Dol) budget are either to reduce take home pay for military personnel or to reduce military nmarpower. The Comptroller (;eneral has previously stated (CAO Report IB-165959, ](c:vcn,b.r 12, 19T() that these to xvays to reduce costs are effectively closed to us, at least in the short run. Reducin D the nunibers of uni- formed srviccnen would affect current international commitmlents of the I niltd tatcs. If going to a salary were to reduce mililary cm- pelsa'.;o, i!'.vu., !rl exacerbatc son of tlce morale and confidence pro- blcins ,Di) is fi:rdinp in the armed forccs at the present time; and add anotl,(:, ne aliv* to the problem of recruiting adequate numbers of volu ntee r ;. Another avenue of exploration open is that of mlanagement c£iicincy of the compcnsation systen. 'iThese aspects of the issue s},oulo1d J !f isiCidrled in tle report. A na jo (cosidtcrationr be(ar in , on the salary systcln alternative is the- ce,,-,crn of s,nie military leaders over the progressive "civilian- iz.ation" tof tlhe arincd forces, and that the intr(,du tion f a salary orm of 1: lil ;t ry conlrc usat on wvould contribute tc such a trend. lhe Military l)cparltet,ts .xpress reat concern tht the steady underminin ! of ,illlit:tl'y cust:s, traitions;, and Vway of life will ad:crsely affect corn- bitt efffec!ie, css \v.iIcn the armjled forces are again dcployed in coibal. It is argu,:ed thit the forili of the cornpensaton systcem chosen s(oi !d rein forlce an:dc enhalnce the Inilitary vaiuces and the special feature s of the mlilitary wvay ot life. A salary sytemn will not do tl:is. This disadvanttle roust be wveighed along with the ad antages of a salary system. 44 APPENDIX V APPENDIX V Another major aspect of the issue is how much a salary approach would really simplify the military compensation system. A fully taxable military salary is generally conceived of as replacing (through combining or establishing on the basis of a standard) at least the following items: basic pay, basic allowance for quarters, basic allowance for subsistence, and the federal income tax advantage n the two allowances which are tax exempt. This would remove these four items from the military compensation list, and replace it with one salary scale. But over 45 special pays, allowances and benefits would probably remain in use. Nor is this surprising, since the system must be competitive for over 1500 separate skills and specialities. The federal civilian compensation! systems and many private sector cormpletlcation systems share these characteristics as well. Thus, the introduction of a salary system would result in a single salary plus special pays and benefits system in lieu of a pay and allowances, special pays and benefits system. Large private sector employers similarly have systems of mulliple salaries plus premium pays plus benefits. To the degree that bene- fits are related to dependency status and "need" in the military conmpen- sation systenm, as they frequently are in private sector and federal civilian systems, it is technically impossible for each member of the same pay grade and longevity step to receive precisely the samne conLen- sation. Thus, the salary system cannot really fully achieve one of the advantages attributed to it. Putting aside premium pays and benefits, and dealing with salary alone, the likely alternatives are a sinlel' basic salary rate plus a nunmber of bonus type pays or a systemn of mnultiple salary rates with fewer bonus type pays. In either event the theoretical objective cannot be fully achieved. These aspects of the question should be described in the report to avoid ever stating the advantages of ':siln- plification" deriving from the salary aiternative. The comments on the difficulty of estinlating values for in-kind quarters in a pay and allowances systerl are well taken; it does make the visual- ization of the value of RMC r.-iore difficult. However, the draft report should also point out that placing appropriate values on these quarters is just as difficult for DoD. It would have to be done under a military salary system to obtain reimbursement for on-post quarters. The question of whether or not to implement a quarters rental system is under review now. If such a system were adopted, much of the visibility problem associated with quarters in-kind would diminish because cash BAQ then would be paid to all members. With it, a relative advantage of a salary system would also diminish. The discussion of the quarters issue should be expanded to present these aspects of it. 45 APPENDIX V APPENDIX V The Draft Report describes some of the reasons for conversion to a salary in foreign military systems. To present a balanced picture it should also describe the degree of success achieved to date: all, particularly the United Kingdom, are experiencing manpower shortages-- meaning that attraction ar retention goals are not being met. Clearly it should highlight that the - ilitary salary in these compensation systems is at a premnium rate above the selected civilian comparability standards in an attempt to count'i the net adverse conditions of military service. Thesc are not reasons, by themselves to reject the salary alternative, but they should be weighed in making the choice. The discussion of a military pay standard also lacks balance. There are certainly disadvantages to seeking to establish a military pay standard. A significant one is the difficulty i selecting the proper standard to ensure competitive pay levels. But the fact that military service is substantially different frcm civilian enploynent probably argues for a pay standard rather than against it. Both sides of the issue should be presented. 46 APPENDIX VI APPENDIX VI PRINCIPAL DOD OFFICIALS RESPONSIBLE FOR ACTIVITIES DISCUSSED IN THIS REPORT Tenure of office From To SECRETARY OF DEFENSE: Harold Brown Jan. 1977 Present Donald H. Rumsfeld Nov. 1975 Jan. 1977 James R. Schlesinger July 1973 Nov. 1975 DEPUTY SECRETARY OF DEFENSE: Charles W. Duncan, Jr. Jan. 1977 Present William P. Clements Jan. 1973 Jan. 1977 ASSISTANT SECRETARY OF DEFENSE (MANPOWER, RESERVE AFFAIRS AND LOGISTICS): John White May 1977 Present ASSISTANT SECRETARY OF DEFENSE (MANPOWER AND RESERVE AFFAIRS): Carl W. Clewlow (acting) Feb. 1977 May 1977 David P. Taylor July 1976 Feb. 1977 John F. Aherne (acting) Mar. 1976 July 1976 William K. Brehm Sept. 1973 Mar. 1976 47
Military Compensation Should Be Changed to Salary System
Published by the Government Accountability Office on 1977-08-01.
Below is a raw (and likely hideous) rendition of the original report. (PDF)