Department of Defense Should Change Pay Setting for Filipino Nationals

Published by the Government Accountability Office on 1977-10-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


U.S. Forces in the Philippinesemploy               about
22,000      Filipino    nationals    who are pard more
than the local wage rates. The Secretary                  of
Defense      should     make changes        which  would
bring wages and benefits            for Filipino  nation.
als more        in line with      local rates, improve
procedures,        and reduce costs.

Department       of Defense      attempts    to follow
local prevailrng     pay practices    have been ham-
pered    by    labor    agreements       and a strong
employee     union, and changes wi!l be drffrcult
to make.

                                                               OCTOBER 5, 1977
                         COMPTROUSR     GENERAL    OF THE   UNITFD   STATES

                                       WASWMWSTDid. D.C. tDlLB


The Honorable     John L. McClellan,                 Chairman
Committee     on Appropriations
United    States  Senate

Dear Mr. Chairman:
        In response       to your rqueat         of April        29, 1977, we are
reviewrng       the compensation        and use overseas             of foreign        na-
tional      employees     by the Department         of Defense,          including        the
possibility        of using alternative          labor     sources       that might
be less costly        to. the. Government.                                          ..          .
                                                                       .                            .
        This report       on fc:2!ign    national       employment         practices
in the Philippines,           the second of a series               of reports        on
five    countries,       addresses    the cost of compensation                 benefits
and separation        allowances,       possible       substitutes         for foreign
national      employees,      and barriers       limiting        'U.S. sontrol         over
wage increases.
          Although     foreign     national      labor     costs      in the Philippines
are relatively           low by world       star.dards,        the Filipino        national
employee        is generously       compensated         relative        to the average
worker        in that    country.       In part,      rhis     results      from agreements
with the Philippine             Government       and the foreign            national     em-
ployees'        union which restrict           the Defense          Department's
flexibility         as an employer.          Compensation          costs      could be re-
duced by improving             procedures      used to determine              wages.     Ac-
cordingly,         w.2 are recommending          to the Secretary             of Defense
that      several     changes be made to wage setting                     methods.
        As requested       by your office,          we did not obtain         formal
comments from agency officials;                 however,       we discussed        the
results      of our work with them and considered                   their    comments.
Defense was not optimistic               that certain        of our recommendations
could be implemented            due to strong        union opposition.            Because
of the political         situation       surrounding       the military       base negotia-
tions,      we also obtained        informal      comments on our draft              report
from the State         Department.         They questioned        the feasibility            of
implementing        our recommendations           in the near future:           instead,
they believe        that any changes should be made over a period                           of
several      years.     While we recognize           that Defense's       flexibil-
ity is limited         by labor     agreements       and the current         political
situation,       we believe      every effort        should be made to assure
that    Filipino      employees     receive     the prevailing         wage.

         As agreed with your office,   we are sending copies of
I   the report   to the Department of Defense.  Copies will   also
    be available   to ether interested parties who request  them.
                                 Sinczreiy         yours,

                                 of the United            States

                                 -     .   .   .                     .

                                     . .
                                 .    *


APPENDIX I                                                             APPENDIX I

       Section     444 of the Foreign Service Act, as amended,
provides     that compensation     for foreign    national  employees
will   be based on locally      prevailing     wage rates that are
consistent      with the public    interest.
       The lead agent for Filipino            national     personnel     policies
is the Navy's Commander in Chief,              Pacific     Fleet,     in Hawaii.
Interservice      coordination      for foreign      national      personnel     poli-
cies in the Philippines          is the responsibility            of the Comman-
der in Chief,      Pacific     Representative,       Philippines,       who acts
on the advice' of 'a'.Joint        Labor- Affairs      Cdrknittee~.'    The'Navy
and Air Force have one voting            member on the Labor Affairs
Committee.       U.S. civilian      agencies     in the Philippines          and
nonappropriated       fund activities      , who base compensation            paid
to their     local employees on Department             of Defense (DOD) wage
survey results , may participate            as nonvoting       me;rlbers.
        Assisted    by the Labor Affairs            Committee,    representatives
of the U.S. Pacific          Fleet in Hawaii oversee wage surveys of
Philippine       companies to determine           local prevailing       practices
and thus foreign        national       compensation     benefits.        Recommen-
dations     for wage increases           are forwarded     to the Pacific        Com-
mand's Joint Labor Policy Committee in Hawaii,                      which coor-
dinates     DOD personnel       policies      in the Pacific      area.     Acting
on the decision        of the policy         committee,    the Commander,
Pacific     Fleet,   in Hawaii,        relays   revised- schedules       to the
Number of-employees          and.wages
       DOD employs nearly  22,000 Filipino               nationals at an es-
timated cost of $42 million     for fiscal              year 1977 as shown
on th, following   page.
          APPENDIX I                                                                        APPENDIX I

                                                                          FY 19 ‘7
                                                     Number of           estimated       Average
                                                     employees            payroll        cost per
                                                     (note a)               costs        employee
                                                                    (000 omitted)

    i     Appropriated  fund:
    i          Navy                                  10,620               $24,794        $2,300
    i          Air Force (note              b)         3,100                 3,101        2,300

            Total                                    13,720                31,895          2,300
    ; '
    /   Nonappropriated            fund:
            Nai'y                                      4,100        * -      5,378       _ 1,300         -.   _
    I   .-  Air Force                   .              3,840:                4,768         1,200

               Total                                   7,940               10,146
                                                                           --              1,300
                       Total                         21,660               $42,041        $1,900
          g/Includes       full-time,            part-time,        and    intermittent      personnel.
          G/Includes    Department               of Defense        162    employees)     and Army
             (2 hires).

                  Filipiro     employees also accrue separation             entitlements
          up to 1 month's pay for each year of service,                   payable upon
          retirement,       disability,       death,    or reduction   in force.       If
          an employee quits           before retirement       or is removed      for cause,
          be receives       no separation        benefits.      As of June 1977, the
          total     separation      liability     was over $23 million       ($18 million
          appropriated        and $5 million         nonappropriated),    or about $1,100
          per employeez
                  Although     wage increases     have averaged about 8.7 percent
          since 1971, devaluations           of Philippine       currency    have limited
          average dollar         cost increases     to about 6.7 percent         annually.
          Bowever, the 1976 wage increases              r*ere sizeable--        percent
          for manual employees and 12 percent for nonmanual.                      Officials
    a.-   predicted       the Philippines     expanding econcmy could lead to
          similar      increases     in the future;     therefore,      employment con-
          straints       and questionable     wage survey techniques          now ha.ving
,         a limited       adverse impact are apt to be tore costly               in future

APPENDIX I                                                          APPENDIX I

Constraints      on DOD'sr
employment     flexibility
         In part,      DOD's' attempts    to adhere to prevailing       practice
criteria        have been constrained       by labor agreements and a
strong local employees'            union.    Basic conditions      of employ-
ment for Filipino          employees are laid out in the Base Labor
Agreement.          The agreement is a diplomatic         arrangement     signed
in 1968 by the Philippine              and United States Governments to
clarify       labor provisions       in the 1947 Military      Base Agz.eement.
Negotiations         for a new bases (and labor)        agreement were..-- ini-
tiated      in April     1976 but have progressed       sporadically.        As
of June 1977, no consensus existed               on when or if a new agree-
ment would be reached.
       Major   provisions     in the Base Labor      Agreementnt include:
                                                                 . . .-
       --Preferential'.emplo~ent.          Filipinos     will   be
                                                                be used in
          clvllian.positions       except when security       or other
          "special       management needs". require     a U.S
                                                          U.S. . citizen.
      --Joint    committee.       A U.S./Philippines       body for the
         purpose of hearing        and attempting       to resolve  any
         dispute   brought to      it by either      side: the committee
         has no enforcement        authority.

                                                   ectave operation
          of the bases" until      the joint    committee has ex-
          hausted attempts      to bring about resolution          of the
          issues in dispute.
       --Wage setting.      Wages and compensation          practices     of
          progressive   employers     will   be determined      by technical
          surveys in which the union will          participate,       and
          these will   be used as a basis for setting             wages of
          U.S. Forces employees..
       --Midyear    bonus. A 200 peso bonus (about              $27 in June
          m/7)   paid to each employee annually.
       In recognition     of Filipino        rights   to organize    and
bargain collectively,        DOD and the employees'          union further
define employer-management          relations       in a Collective     Bar-
gaining   Agreement.      The present        agreement became effective
in 1976 and has a 3-year life.               Most of the provisions        of
the Collective      Bargaining    Agreement elaborate          on provisions
of the Base Labor Agreement.             However, the bargaining          agree-
ment establishes      additional      restrictions      by limiting     the
i            APPENDIX I                                                            APPENDTX I

             annual waqe survey to a current    agreed list of 30 companies,
             with any change to the list  requiring   bo%h DOD and union
,                 If the Base Labor Agreement is renegotiated             as part of
;            a new base rights       package, DC3 officials       are pessimistic
1,           about any relief      from past concessions       and propose to retain
 ,           the status    quo wherever possible        in negotiating    a new labor
I            agreement.     Moreover,     although   the bargaining    eqreement will
             be subject.to    renegotiation       in 1979, it now provides        that cur-
i            rent provisions     remain in effect       unless both signators        agref?
             to changes.
I        .
f            Filipino     national    employees'      union
                     About 16,000 employees-- 80 percent            of the work force--
1    .   .
             are represented       by .one' union, the largest          in the Philippines.          * . *
i            According     to DOD ofiicials,        this union has close ties with
!            the Philippine      Department      of Labor and the news media.            Re-
I            portedly,     wh?n the union is dissatisfied             with a decision      af-
\            fecting     employment,     they appeal to the Labor Department             which
             pursues the issue with the U.S. Embassy.                  The union's     posi-
I!           tion on labor issues          is also well aired by local newspapers.
i            We were told the union can effectively               limit    DOD attempts
             to meet congressionally          established    criteria      of prevailing
             practices     by escalating      disputes    to a government-to-government
             level     or by threatening      to strike.
                      Both the Base Labor and Collective               Bargaining       Agreements
             -state that disruptions        of base operations             before the joint
              committee has taken its final           action      may be cause for with-
              drawing recognition        of that organization             and+disciplining
              disruptive      employees.    Even so, officials             felt   circumstances,
              political      and otherwise,     would dictate         the control       DOD could
              exert.      Because of political       sensitivities,           we were told that
              the Navy, Air Force, and the Embassy would be reluctant                         to
              confront     the union and the Department             of Labor to correct
              some of the concessions         discussed      later      in this report.
                     The Collective   Bargaining      Agreement requires       annual wage
             surveys to ascertain      prevailing      compensation   levels     in the
             Philippine    private   sector.      Survey teams, consisting         of one
             U.S. empioyee and one Filipino           union official,    visit     private
             companies to obtain wage data which is summarized and used
             to establish      wage schedules.
APPENDIX I                                                                 APPENDIX I

      CSe identified    the following    practices      which differ  from
local  prevailing    practice,    affect   the validity      of wage sur-
vey data, and result       in excessive   Defense wage costs:
           --Reiyinq   on wage information           from high    paying       companies
              in a high paying area.
           --Including      monetized    allowances   in base      pay computations        .
               which inflate    other    compensation   items      calculated   on
               base pay.
           --Paying   midyear    bonuses .irl addition   to total           compensa-
              tion reflected     in the p, .vate sector.
           --Matching    average private        sector earnings     to a pre-
       .      determined   wage schedule        step, rather   th'an the .average              .
              work force earnings.
           --Selecting     key jobs     with   limited   regard    to   work     force
Survev        companies    not representative
      DOD bases its wage increases    on wages and benefits  paid
by 30 companies in the Greater Manila area--hiah      payers in a
high wage area.    Moreover, the Subic Bay Naval Complex and
Clark Air Base are located   outside   the Manila area in the
lower cost, smaller   citiec  of Olongapo and Angeles.
       The Collective    Bargaining     Agreement requires   union agree-
ment    on any addition   or change to the company list.         In the
past the union has rejected         proposals   to expand the number
of companies surveyed or to include           companies from areas
around DOD bases.       The union has stated that it opposes
changes to the company list         which might reduce wage survey
        We     compared the results  of           the DOD survey and a recent
Philippine        Government survey of            237 private    Philippine    com-
panies.         For 14 comparable key           jobs,   LCD survey results
averaged        75 percent higher than            the Philippine      Government
survey.         Examples are shown on           the followzng     page.
i       APPENDIX I                                                               APPENDIX I

                                Annual salary,
                                 Governmen:              Annual salary,        Percent DOD
               Job                 survey                 DOD survev               h.lgher
        Clerk      .                 $      838             $1,287                  54
        Laborer                             587                  945                61
        Electrician                         813              1,488                  83
        Security     guard                  794              1,676                 111
        S'.enoyrapher                    1,076               1,720                  60
        NOTE:        Comparability    between Philippine               Government and DOD
                     survey positions     was established              by DOD personnel of-
              ' DOD.officials      did not consider    the Philippines-wide                    .
        survey representative         of wage rates in the vicinity                of the
        two major bases.          We were not able to isolate       those          companies
        surveyed in the immediate bases area, but DODsurvey                          results
        still    averaged 73 percent higher than those for 184                     firms
        in the highest        cost area--Metro   Manila.
                 Based on the above comparison,   DOD is paying consider-
        ably more than Philippine      industry  for comparable positions.
        By expanding the wage survey to include        companies paying
        more moderate salaries,     both inside    and outside  the Manila
        area, F3D could expect more representative         wage data.   De-
        spite predictable     union opposition,   DOD should initiate    ac-
        tions to .amend bargaining     agreement clal-ses that restrict
        flexibility     in company selection.
        Monetized       allowances         inflate   base   pay

                Total compensation          paid to Filipino          employees includes
        base     salary,      a yearend bonus (125 percent              of 1 month's base
        pay) I    a  midyear     bonus    (about       $27 per   emplcyee),      and a cost-
        of-living        allowance     (about      $82 annually      per employee but likely
        to increase         to $180 after        the next wage survey).            Other em-
        ployee benefits          include     eligibility       for premium pay, hospitali-
        zation h,Jd death benefits,                enrollment      in Philippine     Social
    d   Security,        and entitlement         to a lump-sum separation           payment
        upon retirement,           death, or reduction           in force.
               Wage survey teams identify        all compensation       paid by pri-
        vate employers,     including    base pay, cash allowances,          bonuses,
        and payments-in-kind,        such as meals,    transportation,       and
        company products.        To determine    base pay rates,       D3D monetizes
        and combines pavments-in-k,nd         with nriva",E sector base pay
        rates,   which in?lat?s      base pay and in turn inflates          separa-
        tion entitlements,       premium rates,     and bonuses calculatea        on

                                 APPENDIX I                                                        APPENDIX I

                                 base pay rates.   We were told that            private   industry does not
                                 compute its separation.  entitlements,            premium pa;', and bonuses
                                 on base pay plus payments-in-kind,             but on base pay alone:
                                       A sample of 1976 wage survey results         showed t;.at mcne-
                                 tized payments-i n-kind equated to about 17 percent           of base
                                 pay-   By separating    payments-in-kind      from base pay and com-
                                 puting separation    liabilities,      premium pay, and yearend
                                 bonuses on real base pay only, we estimate          that a total   of
                                 $5.6 million   could have been saved in fiscal         year 1977.
                                                         Separation          Premium    Yearend
                                                         liability             EY        bonus        Total
                                 Appropriated   fund:
                                    'Navy                $2,560,000    S1,070,00.0      $120,000   $3,750,000
                                      Air Force              550,330
                                                                  .-        50,oco        70,000       670,000
                                 Total   appropria:   kd 3,110,300         1,120,GOO     190,000    4,420,OOO
                                     Navy                    530,000           90,coo     70,000      690,000
                                     Air Force               420,000           20,000     60,000      500,000
-..,               :
          1         ’
                                 Total nonappro-
  .           ‘\.                  priatcd                   950,000          110,000    130,000    1,190,000
                                           Total         $4,060,000        S1,230,000   $?20,000   $5,610,~~
                                         Navy and Air Force personnel       officials       agreed that
                                 payments-in-kind       should b? segregate3       from base pay.       Because
                                 the Collective      Bargaining    Agreement requires        DOD to pay
                                 wages based on surveys of prevailing            r>ractices     in the private
                    ,c           sector,    we believe     an appropriate   change could be made uni-
                                 laterally.      A similar    plan has been successfully          implemented
                                 by U.S. Forces in Korea.
                                 lilidvear bonus paid in addition
                                 to prevail ina comDensat2on
                                         As an incentive    to the ?hilippine     Government for signing
                                 the i969 Base Labor Agreement,         DOD and State Department       nego-
                                 tiators    agreed to pay an annual 200 peso (about $27) midyear
                                 bonus to each employee.         Because of tne extenuating      circum-
                                 stances concerning      midyear bonuses, DZD wage specialists
                                 consider    midyear bonuses payable in addition          to compensation
                                 based on annual wage surveys.          For example,    if an employee's
                                 annual wage is determined        tc ne 52,OCZ after wage survey data
                                 has been analyzed,      he then receives     52,000 plus his midyear
                                 bor‘us, or $2,027.

      APPSDIX          I                                                                   APPENDIX I

              In line    with prevailing       practice       criteria,         the midyear
      bonus should       be considered       as par t of total           employee      compen-
    . sation.      Waqe survey     data already         includes        midyear     bonuses
      paid    in the private      sector     (about     20 percent         of surveyed      em-
      ployees    received     midyear     bonuses     in 1976).          Using the above
      example,     the employee       should    receive      $1,973      in other     wages
      plus    the $27 midyear      bonus,     or $2,000.
               By considering          midyear     bonuses   as part  of total  com-
      pensation,       appropriated          fund activities     could have saved
      about     $370,030       in 1977 ($290,000          by the Navy and $80,000    by
      the Air Force).              Another     $220,000    would be saved by nonap-
      propr.iated      activities.

      Feed    to match   averaqe           prevailina
      rate    to averaa%ZZZncs                     *
                                                         . .. .     ..          . . .                 .   .
                                                                                                              .   .
              Presently,         the a\ erage        lok:al    wace. determined           by the
      DOD survey        is established            as step 4 >Z the Filipino                  employ-
      ees ’ 20-grade        c 7-ste::,    wage schedule;-         . In a 1975 report                  on
      U.S.    Federal      blue-callar          employees,        LL”*O suggested         that      private
      sector     average       pav rates        should      be -*-ated         to a point         in
      the pay range equal to the average                        c:c-p of employees             rather
      than a predetermined              step.        Feder: I w’lite-collar              wages are
      determined       by eucating          averag,e pr.l--3te          sector      rates    with
      the average         Fedrtra.1 rate.          The OiflsZ        of Management           and
      Budget,      the C:. 7” Service            Commissicn,         2nd GAO reasoned               that
      this    was appropr,.?te          because        private      sector       averages      repre-
      sented     neither       an entry       rate nor a r’inal            rate,      but instead,
      a rate     earned      by persons         who aver‘?Ged        an unknown number of
      years’     experience         and an unknown number of pay increases
      corresponding          to Federal         within-grade         increases.           The Sec-
      retary     of Defense         commented        on this      point      in a recent         letter
      to the Chairman           of the Senate Armed Services                      Committee         en-
      dorsing      Federal      blue-collar          wage reform         in the United           States.
      He reported       :

               “True  comparability          cannot      be achieved,        however,
              as long     as there      is a requirement              for any fixed
              step as the payline            rate.       St can only be achieved
              by comparing        averaae      private       industry     earnings
              as determined        by surveys         to the average         earnings
              of Federal      blue-collar          workers       and then making
              adjustments       in rates       to bring        Federal    rates    in
              line   with   local     prevailing         rates.”
               In   our view,    this    should    also apply    to determining
      foreign       national    wages.     The Filipino     national     work force
      currently        averages    ster, 5.     If 1976 wage survey       results


APPENDIX I                                                        APPENDIX I

had been pegged to this average rather      than step 4, about
$930,000 in appropriated     funds ($720,000 by the Navy and
$210,000    by the Air Force) would have been saved in 1977.
An additional     $300,000 ($160,000 by the Navy and S140,OOO
by the Air Force) could have been saved by nonappropriated
fund activities.
Key iob selection       should   reflect
work  force composition
       The Defense survey in the Philippines          establishes      new
wage rates by obtaining     prevailing     rates for about 100 "key
jobs."     Selecting key jobs that are representative             of the
work   force is essential    to determining     valid    prevailing
wage rates.
       ‘Althougzh the Navy employs. over 75 -percent of the\ Fili-
 pinos paid with appropriated               funds, it does not periodically       /
 inventory       its %ork force--that           is, determine  how many clerks,   1
 accountants,        carpenters,     etc.,      are employed.   As a result,
.the hoary cannot determine            whether survey key jobs give a
 valid     representation        of prevailing      wage rates for its work       i
 force.       Although     the Air Force and the major nonappropriated
 fund employers could identify                the number of employees in          I
 such positions,         they had not reviewed the key job list            to
 ensure representation.
      bje believe  DOD would benefit      by updating   and revising
its key job list.     For example,    white-collar     key jobs make
up over half the positions      surveyed,    but white-collar     em-
ployees account for only one third         of DOD's work force.
Also, DOD's key jobs represented       less than 9 percent       of
U.S. Embassy local employees,       even though the Embassy and
other U.S. civilian    agencies base annual wage increases           on
DOD surveys.

       tie suggested,     and officials  agreed, that work force                  9,
composition     should be monitore3     and key jobs appropriately
updated.      In addjtion,    key job selection   snould be coor-
dinated    with al! U.S. Government agencies in the Philip-
LIMITED OPPORTUKITIES TO 'NCREASE                                                 t
      Although,    relative  to the private    sector,     Filipino   em-
ployees appear to be generously      compensated,      Filipino     wage
costs remain well below U.S. civilian         costs.     On a one-for-
one basis,    it is unlikely   that a Filipino      employee could

                                                                       APPENDIX I

be cost effectively      replaced   by a U.S. civilian.    In addi-
tion,    DOD is limited    in its employing of U.S. civilians     in
Filipino    positions   by a preferential    employment clause in
the Base Labor Agreement.
       DOD employs about 1,160 U.S. civilians              in the Philip-
pines,    including       about 540 teachers     for DOD dependents.      Non-
appropriated       activities       employ an additional     530. DOD's
U.S. civilian       payroll      will  total nearly $23 million    in fiscai
year 1977, or about $21,000 per full-time                employee (excluding
change-of-station           costs).
        About 500 of these U.S. civilians                are hired locally
through the DOD dependent-hire                program or through overseas
limited     appointments.        Local hires receive           no change-of-
station     benefits,     area-differentials,           or quarte,rs.allowance,
and they-are       generally     not .eligible       for civil     service   retire-     .
ment.      Even so, foreign        national      costs remain well below U.S.
local-hire     costs.       We estimate       that locally      hired U.S.
civilians     cost four to five times more than Filipino                    em-
ployees     in comparable positions.
        Article      I, paragraph         1, of the Base Labor Agreement
provides       that Filipino         citizens      will  be used in civilian
positions        except when security            or other special     management
needs require          a U.S. citizen.           The Collective     Bargaining
Agreement further           defines       special     management needs as when
duties      require     (1) an understanding            of U.S. cultural     or ethnic
characteristics,           (2) technical          advice sensitive    to policv
decisions        or actions       on behalf of the bases, and (3) direct
discipline        or control        of U.S. citizens       involved   in recrea-
tional      or.social      activities.
       The Collective        Bargaining   Agreement also requires        that
whenever a position          occupied by a U.S. civilian         is vacated,
the position     will    be reevaluated      to determine    whether the
special    management needs still         exist.    The Filipino      employ-
ees ' union frequently          questions  U.S. civilian     positions     and
recently    requested      that 100 U.S. positions        be redesignated
as Filipino     positions.
      In a July 28, 1976, letter     to the Secretary    of Defer:se
(FPCD-76-79,   B-182312),  GAO questioned    the preferential     em-
ployment  clause in the labor agreement on the grounds that
it may violate    section 106 of Public    Law 92-129, approved
September 28, 1971, which provides:


      APPENDIX I                                                         APPENDIX I

            "* * * Unless prohibited          by treaty,    no person shall
            be discriminated        agairst    by the Department     of De-
            fense or by any officer          or employee thereof        in the
            employment of civilian          personnel    at any facility      or
            installation       operated by the Department       of Defense
            in any foreign       country because such person is a
            citizen      of the United States or is a dependent of a
            member of the Armed Forces of the United States
            * * **ti

             DOD has argued that the agreement has the same binding                   _
      effect   as a treaty   and therefore  is exempt from the provi-
      sions of section     106.  As of March 1977 no lawsuits  were
      pending to test this interpretation.
              The House Appropriations        Commit.teq has also taken issue
    . with the preferential         employment- clause and believes        DOD
      should renegotiate        those agreements which provide       little
      or no flexibility       to the military     service   to employ the
      type of labor that it. believes          to be lowest in ,ost,       most
      efficient,      or necessary    for the welfare     of its personnel.
              Local officials          believe   the preferential     clause does
      not adversely         affect     base operation      costs because Filipino
      costs are considerably              lower than U.S. civilian        costs.
      Moreover,      DOD dependents have less need to work in the
      Philippines        than in higher cost areas, such as Germany or
      Japan.      Officials        also believe     they retain   some flexibility
      in hiring      DOD dependents.           For example, we were told that
      the Navy and Air Force recently                 hired an additional       470
      DOD dependents          under a Summer Bire Program (paying $1 per
      hour) with no strong union opposition.
              DOD appropriated      fund activities   employ   nearly    14,000
      foreign    national    employets   in the Philippines      with payroll
      costs exceeding       $31 million    and a separation    liability      of
      $18 million.        The 19'76 wage survey resulted     in sizeable        pay
      raises,    and future    raises were expected to be significant.
             Although    wages in the Philippines         are relatively     low by
      world standards,        DOD's employees are paid considerably            more
      than prevailing        private    sector rates--the    criteria    for com-
      pensation     established       in the Foreign Service Act.        For ex-
      ample,    DOD is limited        by the agreement with the employees'
      union to surveying          high paying companies.


     APPENDIX I                                                                 APPENDIX I

          Other questionable    wage practices    differ    from frevail-
     ing practice,  add to wage costs,     and affect    the validity     of
     wage survey data.     These practices    are
            --including        monetized    allowances      in base pay computa-
            --paying       midyear bonuses in addition             to total  compen-
               sation      based on,?revailing private             sector practices,
            --matching     average private    sector wage rates                  to a
               predetermined     wage schedule step, and
                =--selecting  wage survey key jobs         with     limited       regard
                   to work force composition.
                We recommend that the-secretary-of              Defense       direct    the
     military       departments  to:        . .

                --Initiate    action to obtain      control       over    the selection
                    of companies surveyed.          '       .
                ---Separate       monetized      allowances   from base pay, thereby
                    reducing      the basis for computing separation        pay
                    liabilities,          premium pay, and yearend bonuses.       (Es-
                    timated      $4.4 million       savings annually  to the Govern-
                   ment plus an additional              $1.2 million for nonappro-            .
                    priated      activities.)
                --Make midyear bonuses part of, instead       of an addition
                   to, total  compensation based on prevailing      amounts.
                   (Estimated  $370,000 annual savings to the Government
                   plus $220,000 for nonappropriated   activities.)
                --Apply    average survey results     to the Filipino average
                   step rather     than to a predetermined   midpoint step.
                   (Estimated    $930,000 annual savings plus $300,000 for
                   nonappropriated     activities.)
                --Develop   and coordinate  occupational ir.ventories   to
                   ensure that survey key jobs represent     :he work force
                   of DOD and U.S. civilian    agencies.