oversight

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)

                           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
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                                                                                                                                                                                                                                                                        C02..
                              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