DOD’s Compensation System Lacks Transparency to Identify Total Costs and How Compensation Is Allocated

Decision makers in Congress and at DOD do not have adequate  transparency over total costs for providing military compensation to active  duty servicemembers in terms of how compensation is allocated in the near  term, if compensation investments are cost effective in meeting recruiting  and retention goals, how much changes to compensation will cost in the  long term, and whether compensation costs are affordable and sustainable  in the future. Lack of transparency over costs is in part due to the sheer  number of pays and benefits that make up the military compensation  system and to the lack of a single source to show total cost of  compensation. The lack of transparency over total costs to compensate  servicemembers impacts decision makers’ ability to manage the system,  including (1) assessing the long-term cost implications, (2) determining  how best to allocate resources to ensure an optimum return on investment,  and (3) assessing the efficiency of the current compensation system on  DOD’s ability to meet recruiting and retention goals. Heavy Reliance on Benefits May Not Be Appropriate for Meeting Key Human Capital Goals or Not Sustainable in the Long Term

The federal government’s total costs to compensate its active duty  servicemembers have increased significantly in the past 5 years, and given  that costs are heavily weighted toward noncash and deferred benefits, the  structure of the current compensation system raises questions about the  reasonableness, appropriateness, and long-term affordability and  sustainability of DOD’s approach to compensating its military workforce. Compensation Costs Have Significantly Increased

The total cost to the government to provide compensation for active duty  members has grown about 29 percent, adjusted for inflation, between fiscal  years 2000 and 2004, as shown in figure 1. In addition, special and incentive pays grew about 30 percent—from $3.3  billion to $4.3 billion—from fiscal years 2000 through 2004. It emphasizes the need to  maintain programs and services viewed as benefits by servicemembers. Compared to civilians in government and in the private sector, the  military’s compensation costs are much more heavily weighted toward  benefits and deferred compensation like retirement and health care for  retirees. Military Compensation System Is Weighted Toward Noncash and Deferred Benefits

In fiscal year 2004, noncash and deferred benefits made up about 51  percent of total compensation costs, on average. DOD’s Lack of an Effective Communication and Education Effort on Compensation Has Allowed Servicemembers’ Misperceptions and Concerns about Their Compensation to Perpetuate

According to DOD surveys and analysis of our focus group findings and  survey data, many servicemembers are dissatisfied, and in some cases,  harbor significant misperceptions about their pay and benefits in part  because DOD does not effectively educate them about the competitiveness  of their total compensation packages. Servicemembers, especially junior officers who said they do not intend to  stay in the military for a full 20-year career, told us that they would prefer  DOD to give them cash that they could invest toward their retirement. These findings suggest that a culture of dissatisfaction and  misunderstanding about compensation exists among servicemembers. The most recent Quadrennial Review of Military  Compensation—a DOD commission that reviews military compensation— found that cash compensation fares favorably overall to civilian wages. This lack of transparency is becoming a more urgent matter  today as DOD and all federal agencies face tough choices ahead managing  the serious and growing long-term fiscal challenges facing the nation. DOD partially concurred with our third recommendation to develop a  comprehensive communication and education plan to inform  servicemembers of the value of their pay and benefits and the  competitiveness of their total compensation package when compared to  their civilian counterparts. Scope and Methodology

	Calculation of the Costs of Providing Active Duty Compensation

To calculate the cost of compensating active duty servicemembers to the  federal government, we interviewed officials from the Department of  Defense (DOD) including the Office of the Secretary of Defense,  Undersecretary for Personnel and Readiness’ office of compensation, the  office of the Comptroller within the Office of Secretary of Defense and the  services, the Office of the Actuary, and Health Affairs. A. catch up to what it would have been without the Redux  62. penalty.
Why GAO Did This Study

Over the years, the Department of Defense's (DOD) military compensation system has become an increasingly complex and piecemeal accretion of pays, allowances, benefits, and special tax preferences. DOD leaders have expressed concern that rising compensation costs may not be sustainable in the future and could crowd out other important investments needed to recapitalize equipment and infrastructure. Given the looming fiscal challenges facing the nation in the 21st century, GAO believes it is time for a baseline review of all federal programs to ensure that they are efficiently meeting their objectives. Under the Comptroller General's authority, GAO (1) assessed whether DOD's approach to compensation provides adequate transparency over costs; (2) identified recent trends in active duty compensation, and how costs have been allocated to cash and benefits; and (3) reviewed how active duty servicemembers perceive their compensation and whether DOD has effectively explained the value of the military compensation package to its members.

What GAO Found

DOD's historical piecemeal approach to military compensation has resulted in a lack of transparency that creates an inability to (1) identify the total cost of military compensation to the U.S. government and (2) assess the allocation of total compensation investments to cash and benefits. No single source exists to show the total cost of military compensation, and tallying the full cost requires synthesizing about a dozen information sources from four federal departments and the Office of Management and Budget. Without adequate transparency, decision makers do not have a true picture of what it costs to compensate servicemembers. They also lack sufficient information to identify long-term trends, determine how best to allocate available resources to ensure the optimum return on compensation investments, and better assess the efficiency and effectiveness of DOD's current compensation system in meeting recruiting and retention goals. To address this and other major business transformation challenges in a more strategic and integrated fashion, GAO recently recommended the creation of a chief management official at DOD. Transparency over military compensation is critical because costs to provide compensation are substantial and rising, with over half of the costs allocated to noncash and deferred benefits. In fiscal year 2004, it cost the federal government about $112,000, on average, to provide annual compensation to active duty enlisted and officer personnel. Adjusted for inflation, the total cost of providing active duty compensation increased about 29 percent from fiscal year 2000 to fiscal year 2004, from about $123 to $158 billion. During this time, health care was one of the major cost drivers, increasing 69 percent to about $23 billion in fiscal year 2004. In addition, military compensation is weighted more toward benefits compared with other government and private sector civilian compensation systems. Furthermore, less than one in five service members will serve 20 years of active duty service to become eligible for retirement benefits. Increasing compensation costs make the need to address the appropriateness and reasonableness of the compensation mix and the long-term affordability and sustainability of the system more urgent. DOD survey results and analysis of GAO focus groups and survey data have shown that servicemembers are dissatisfied and harbor misperceptions about their pay and benefits in part because DOD does not effectively educate them about the competitiveness of their total compensation packages. About 80 percent of the 400 servicemembers that GAO surveyed believed they would earn more as civilians; in contrast, a 2002 study showed that servicemembers generally earn more cash compensation alone than 70 percent of like-educated civilians. Servicemembers also expressed confusion over aspects of their compensation, like retirement, and many complained that benefits were eroding despite recent efforts by Congress and DOD to enhance pay and benefits. By not systematically educating servicemembers about the value of their total compensation, DOD is essentially allowing a culture of dissatisfaction and misunderstanding to perpetuate.