3
Summary and Assessment of Previous Studies

In considering the manpower needs for a transformed force, it is useful to review past research and study group efforts for insights relevant to the Department of the Navy. The Preface highlights two such efforts: the 2006 Department of Defense (DOD) report of the Defense Advisory Committee on Military Compensation (DACMC)1 and the 2005 report by the Center for Naval Analyses (CNA), Military Compensation Reform in the Department of the Navy.2,3 The CNA report was itself a compendium and review of recommendations from earlier studies. In addition, the committee reviewed studies of the effects of deployment on retention later in this chapter.4

1

Defense Advisory Committee on Military Compensation. 2006. The Military Compensation System: Completing the Transition to an All-Volunteer Force, Arlington, Va., April.

2

Michael Hansen and Martha Koopman. 2005. Military Compensation Reform in the Department of the Navy, Center for Naval Analyses, Alexandria, Va., December.

3

A third document highlighted in the Preface is the Department of the Navy Human Capital Strategy, which is addressed in Chapter 5. See William A. Navas Jr., Assistant Secretary of the Navy, Manpower and Reserve Affairs; LtGen Garry L. Parks, USMC, Deputy Commandant, Manpower and Reserve Affairs; and VADM Gerald L. Hoewing, USN, Chief of Naval Personnel, 2004, Department of the Navy Human Capital Strategy, Department of the Navy, Washington, D.C., June 21.

4

See James Hosek and Mark Totten, 1998, Does Perstempo Hurt Reenlistment? The Effect of Long or Hostile Perstempo on Reenlistment, RAND Corporation, MR-990-OSD, Santa Monica, Calif.; James Hosek and Mark Totten, 2002, Serving Away From Home: How Deployments Influence Reenlistment, RAND Corporation, MR-1594-OSD, Santa Monica, Calif. A similar result is found for officers; see Ronald Fricker, 2002, The Effects of PERSTEMPO on Officer Retention in the U.S. Military, RAND Corporation, MR-1556-OSD, Santa Monica, Calif.; Heidi Golding with David Gregory, 2002, Sailors’ Willingness to Complete Sea Tours: Does Money Matter?, Center for Naval Analyses, CNADRM 00006886/Final, Alexandria, Va., December.; and James Hosek, Jennifer Kavanagh, and Laura Miller, 2006, How Deployments Affect Service Members, RAND Corporation, MG-342-RC, Santa Monica, Calif.



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3 Summary and Assessment of Previous Studies In considering the manpower needs for a transformed force, it is useful to review past research and study group efforts for insights relevant to the Depart- ment of the Navy. The Preface highlights two such efforts: the 2006 Department of Defense (DOD) report of the Defense Advisory Committee on Military Compen- sation (DACMC)1 and the 2005 report by the Center for Naval Analyses (CNA), Military Compensation Reform in the Department of the Nay.2,3 The CNA report was itself a compendium and review of recommendations from earlier studies. In addition, the committee reviewed studies of the effects of deployment on retention later in this chapter.4 1 Defense Advisory Committee on Military Compensation. 2006. The Military Compensation Sys- tem: Completing the Transition to an All-Volunteer Force, Arlington, Va., April. 2 Michael Hansen and Martha Koopman. 2005. Military Compensation Reform in the Department of the Nay, Center for Naval Analyses, Alexandria, Va., December. 3A third document highlighted in the Preface is the Department of the Nay Human Capital Strategy, which is addressed in Chapter 5. See William A. Navas Jr., Assistant Secretary of the Navy, Manpower and Reserve Affairs; LtGen Garry L. Parks, USMC, Deputy Commandant, Manpower and Reserve Affairs; and VADM Gerald L. Hoewing, USN, Chief of Naval Personnel, 2004, Department of the Nay Human Capital Strategy, Department of the Navy, Washington, D.C., June 21. 4 See James Hosek and Mark Totten, 1998, Does Perstempo Hurt Reenlistment? The Effect of Long or Hostile Perstempo on Reenlistment, RAND Corporation, MR-990-OSD, Santa Monica, Calif.; James Hosek and Mark Totten, 2002, Sering Away From Home: How Deployments Influence Re- enlistment, RAND Corporation, MR-1594-OSD, Santa Monica, Calif. A similar result is found for officers; see Ronald Fricker, 2002, The Effects of PERSTEMPO on Officer Retention in the U.S. Mili- tary, RAND Corporation, MR-1556-OSD, Santa Monica, Calif.; Heidi Golding with David Gregory, 2002, Sailors’ Willingness to Complete Sea Tours: Does Money Matter?, Center for Naval Analyses, CNADRM 00006886/Final, Alexandria, Va., December.; and James Hosek, Jennifer Kavanagh, and Laura Miller, 2006, How Deployments Affect Serice Members, RAND Corporation, MG-342-RC, Santa Monica, Calif. 59

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60 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE This chapter summarizes those studies and critiques their recommendations based on their potential for enabling the Department of the Navy to meet its future manpower and personnel objectives. The chapter begins with brief summaries of the DACMC report and the CNA study. It continues with an explanation of the criteria that the committee considered in assessing these studies and provides a critique of the findings and recommendations of these studies. The next section summarizes the deployment studies. The chapter concludes with a summary of the committee’s findings and recommendations related to the studies it reviewed. SuMMARy OF DEFENSE ADVISORy COMMITTEE ON MILITARy COMPENSATION REPORT The DACMC was chartered in March 2005 to advise the Secretary of Defense on military compensation. The committee, led by Admiral Donald Pilling (USN, retired), conducted research and held public meetings over the course of one year, resulting in a final report in April 2006.5 Like several other recent studies, the DACMC report explores changes to pay and benefits aimed at ensuring the future recruitment and retention of high-qual- ity personnel in a cost-effective manner to sustain a ready force.6 The DACMC believed that the Secretary of Defense and services know best how to manage the force. Its intent was not to provide specific recommendations and precise mili- tary compensation policy changes. Rather, it provided a framework for guiding change, and a set of recommendations based on that framework. The following paragraphs summarize the guidelines recommended by the DACMC and their study recommendations. guidelines for Change The DACMC’s framework calls for changes to the military compensation system that will help maintain the volunteer professional force. Changes should be aimed at improving force staffing, force management, motivation, and per- 5 Defense Advisory Committee on Military Compensation. 2006. The Military Compensation Sys- tem: Completing the Transition to an All-Volunteer Force, Arlington, Va., April. 6 For example, the Defense Science Board (DSB) Task Force on Human Resources Strategy in 2000 also addressed this issue (Defense Science Board, 2000, Human Resources Strategy, Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, Washington, D.C.), as did the 2001 Quality of Life (QoL) Panel led by Admiral David Jeremiah, USN, retired (Naval Research Advisory Committee Report, 2001, Quality of Life: Reiewing Commitment to Our People, Office of the Assistant Secretary of the Navy for Research, Development and Acquisition, Washington, D.C.). The DACMC, cited in footnote 1, also builds on a longer history of compensation study groups, including nine Quadrennial Review of Military Compensation studies. Because of the long history of compensation studies, including the recent DSB and QoL panel reports, the DACMC was able to draw on a rich and well-developed literature. The same is true for the CNA study cited in footnote 2. The tenth Quadrennial Review of Military Compensation is underway as of this writing.

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61 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES formance, and at making the system more efficient. That is, the changes should help meet the goals of any compensation system, namely, to attract, retain, and motivate the right quantity and quality of service personnel, assign them where they are needed, and do so cost-effectively. The specific criteria or principles recommended by the DACMC as guidelines for changing the active and reserve compensation system were the following: 1. Force management. Changes to compensation should be tied to force management goals. 2. Flexibility. The compensation system should adjust quickly to changes in supply and demand of personnel in general and specific skill areas. 3. Simplification. Changes to compensation should promote simplicity rather than complexity to improve understanding of the system by members. 4. Systems approach. A change should consider the force management impli- cations for active and reserve personnel. 5. Choice, olunteerism, and market-based compensation. Changes should promote choice and member preference rather than involuntary assignment. 6. Efficiency. Changes to compensation should meet objectives cost-effectively. 7. Cost transparency and isibility. The full costs, over time, of changes should be clear to policy makers. 8. Leerage. Where possible, compensation improvements should leverage benefits in the civilian sector rather than crowd them out. 9. Fairness. Commitments should be honored. DACMC Findings and Recommendations for Change Overall, the DACMC concluded that current compensation levels are ade- quate to meet staffing needs, but the structure of compensation should be improved to give force managers more flexibility and to increase the efficiency and effec- tiveness of the compensation system. The DACMC focused on six major topic areas. Retirement Reform The DACMC argued that the current system for active-duty service mem- bers is inequitable, inflexible, and inefficient. The system is inequitable because most members never reach 20 years of service and thus never receive benefits. It is inflexible because its one-size-fits-all approach leads to an overuniformity of career lengths, which in turn impedes flexible force management. Career lengths are too short in many career fields, but too long in others. The system is inefficient because it backloads military compensation in deferred compensation that most members will never receive and do not value highly. The DACMC points out that

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62 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE the typical military member is relatively young, and young people tend to discount deferred benefits at high rates. As a result, it costs more to improve retention by increasing deferred compensation than by increasing current compensation. The military compensation system would be more efficient if a higher share were in current rather than deferred compensation. The DACMC recommended a three-part reform of the active-duty military retirement system: 1. A 401(k)-like plan, vesting after 10 years of service, to which the govern- ment would contribute in the range of 5 percent of basic pay; 2. A defined-benefit plan that would pay an annuity beginning at age 60, vesting after 10 years of service, using a formula similar to the current retirement annuity formula; and 3. Additional current compensation to achieve force management goals. Such compensation might come in the form of separation or transition pay of limited duration for those who leave after the vesting point; increases in basic pay or bonuses; or “gate pay” for members completing key career milestones,7 such as at 10, 15, 20, 25, and 30 years of service. Pay for Performance, Pay Table Reform, and Pay Differentials Based on Dependency Status The DACMC found that current policies reward performance almost exclu- sively through the promotion system, with the main financial incentive being higher basic pay. The current pay table specifies pay as a function of a member’s pay grade and time in service or longevity. Consequently those who are promoted earlier than their peers experience only a short-lived financial advantage. Once peers are promoted, the financial advantage disappears. Thus, the overall pay advantage for those who perform especially well is relatively small. Another disadvantage of the current time-in-service pay table is that it does not account for civilian experience. Because pay is tied to tenure in the military, the services are constrained in attracting either lateral entrants who developed needed skills in the civilian world or individuals with prior military service who wish to reenter the military after gaining experience on the outside. The DACMC recommended changing the pay table to make basic pay a function of grade and time in grade, rather than grade and years of service. Those promoted earlier than their peers would enjoy a larger permanent pay advantage. For individuals entering the services from civilian life, the shorter total time in service would not make their pay lower than that of their peers with similar total levels of experience. 7 “Gate pay” is additional pay or a bonus that is a multiple of basic pay and is payable at key years of service such as 10, 15, 20, 25, and 30 years.

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63 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES The DACMC also examined allowances for housing. Today housing allow- ances for members with dependents are about 25 percent greater on average than for members at the same grade and year of service who do not have dependents. This difference in compensation is not related to a difference in productivity. The bigger paychecks for those with dependents provide an incentive for members to marry or have children and for members with families to stay in service. The DACMC recommended that this differential be eliminated by paying the housing allowance to every member at the “with dependents” rate. The DACMC also recommended that all members receive a housing allow- ance, whether or not they live in government housing, and that those in govern- ment housing pay fair market rental rates. This may mean that some members, especially junior enlisted members living in barracks, would receive housing allowances in excess of the new rents they would pay. Finally, the DACMC recommended that the family separation allowance (FSA) be consolidated with other special and incentive pays related to deployment or unaccompanied tours, arguing that the appropriate level of compensation for deployments should not differ between those with and without dependents. Special and Incentie Pays The DACMC found that while special and incentive pays are an important part of the overall military compensation package, they are less effective than they could be. First, managing and monitoring the large number of special and incen- tive pays is burdensome. Second, the payment criteria and amounts for some of the pays are set rigidly in law and difficult to change. Furthermore, some of these amounts have become entitlements, paid without regard to force management considerations. Third, special and incentive pays are the services’ main tool for flexible force management, yet they constitute less than 5 percent of immediate cash pay.8 The DACMC recommended that special and incentive pays be consolidated into a smaller number of categories. Within each category the budget would be fungible; the Secretary of Defense and secretaries of the military depart- ments would have authority to determine criteria and to set and change payment amounts. The DACMC also recommended that special and incentive pays be increased as a share of compensation. Once increased, the effectiveness of these pays in achieving force staffing goals should be assessed to determine whether the increase in share should be sustained. 8 See P.F. Hogan, C.J. Simon, and J.T. Warner, 2004, “Sustaining the Force in an Era of Transforma- tion,” in The All-Volunteer Force: Thirty Years of Serice, B.A. Bicksler, C.L. Gilroy, and J.T. Warner (eds.), Brassey’s, Inc., Washington, D.C.

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64 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE Military Health Care Benefit The DOD offers a health care benefit called Tricare to active-duty military personnel and their families as well as to retirees and their spouses and surviving spouses. For active-duty members and their families, Tricare provides comprehen- sive health care with virtually no premium or out-of-pocket expenses. The nature of Tricare’s coverage for military retirees and their spouses depends on the individual beneficiary’s eligibility for Medicare. If the retiree or spouse is Medicare-eligible (usually that means age 65 or older), then Medicare is the first insurer, and Tricare, which in this case is called Tricare for Life, pro- vides wrap-around coverage. Retirees and spouses who are not yet eligible for Medicare can choose from among several coverage options, much as in a private- sector plan. The DACMC found that Tricare for Life, the wrap-around coverage offered to military retirees who are eligible for Medicare, has shortcomings. Although it is quite expensive to provide, it is not highly valued by the typical active-duty service member, who is relatively young and is not fully appreciative of benefits that will not accrue until age 65. The DACMC also found that the premiums and other fees paid by pre-age 65 retirees for their Tricare coverage are substantially lower than those of plans typically offered by civilian employers. As a result Tricare tends to crowd out any civilian health benefits that might be available to this group. Yet policy makers have little incentive to minimize the cost of pre-65 health care, because any sav- ings from policy changes would not be realized until far into the future. To address these issues the DACMC recommended that premiums and other fees under Tricare Prime, the health maintenance organization option under Tricare, be set for pre-65 retirees to be more consistent with the cost-sharing provisions under typical civilian employer plans. To stay in line with civilian plans those Tricare fees should grow at the same rate as the annual cost-of-living adjustment to the military retirement annuity. The DACMC also recommended that Tricare for pre-65 retirees be funded on an accrual basis, similar to the current retirement system and to the Tricare for Life program for post-65 retirees. Putting the program for pre-65 retirees on an accrual footing would force policy makers to recognize today the future costs of retiree health benefits for all currently serving members. The move should improve incentives for leaders as they consider policies related to end strength, tenure profiles, and health care programs. Quality of Life The DACMC focused on two quality-of-life issues, spouse employment and dependents’ schools. It argued that because of frequent moves and assignments to rural areas, military spouses face reduced civilian opportunities relative to civil-

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65 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES ian spouses. In addition, the educational opportunities for children and spouses are less than desired. Greater choice in assignment, along the lines of what the Navy offers under the assignment incentive pay program, provides opportuni- ties to avoid problems and to reduce the hardships associated with less preferred assignments, including less desirable employment and educational opportunities for spouses and children. The DACMC pointed out that quality-of-life programs can offset some of the hardships and challenges of military life for members and their families. The DACMC agreed with the economics literature, which finds compensation deliv- ered in-kind to be generally less efficient than cash, because cash can be used flexibly for any purpose whereas noncash compensation cannot. Other things being equal, people tend to prefer cash to a commodity of the same cost. The DACMC also noted that it is generally difficult to quantify the effect of quality-of-life programs on retention or readiness. Because these programs are typically small in scale, their predicted effects on retention are generally modest. Consequently little information is available on the cost-effectiveness of quality- of-life benefits. The DACMC argued that the ultimate responsibility for quality of life rests with the commanders of military units. Therefore, it is important that commanders of units ensure that members understand and take advantage of available quality-of-life programs. The DACMC recommended a rigorous periodic reevaluation of these pro- grams, to ensure the best allocation of resources between cash and in-kind ben- efits. Such evaluations must recognize the difficulty of quantifying the effects of quality-of-life programs on retention and other metrics of readiness. The DACMC therefore recommended that DOD develop guidelines for determining the effec- tiveness of quality-of-life programs. Resere Compensation The DACMC acknowledged the changing role of the reserves, from the strategic missions of the Cold War to an operational role, under which more reserve members are now being activated and for longer periods. The DACMC noted that while the Army’s Reserve Component fell short of recruiting targets in recent years, reserve recruiting and retention in the other services have remained adequate, despite increased usage in support of Operation Enduring Freedom and Operation Iraqi Freedom. When reservists are mobilized, they and their families become eligible for Tricare. If they were previously covered by the health plan of a civilian employer, switching to Tricare may mean changing doctors and other health care providers. The DACMC found that many reserve members attempt to maintain continu- ity of care by keeping their civilian employers’ health insurance when they are activated. The DACMC recommended guidelines for setting reserve compensation.

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66 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE First, it recommended that activated and mobilized reservists should receive the same pay and benefits as their active duty counterparts. Second, it recommended that compensation policy should be coordinated to the extent that active and reserve components recruit from the same markets, as in the case of nonprior- service personnel, and that prior-service reserve personnel are drawn from those who separate from active duty. Third, it recommended that the reserve components be given the flexibility to set recruitment and retention bonuses that vary by geo- graphic location and or unit. Currently such bonuses vary by occupation. To the extent that staffing problems arise at the unit and local level, locale- or unit-based bonuses could help the reserves resolve these staffing issues. SuMMARy OF CENTER FOR NAVAL ANALySES REPORT To identify promising compensation tools to meet the Navy’s 2004 human capital strategy (HCS), the Assistant Secretary of the Navy for Manpower and Reserve Affairs (M&RA) and the Deputy Assistant Secretary of the Navy for Total Force Transformation (DASN[TFT]) formed a compensation team in 2005. The team drafted guiding principles and strategic goals and asked the Center for Naval Analyses to assess major compensation tools in light of these goals. In brief, the goals, drawing from the HCS, are to recruit, retain, motivate, and develop person- nel who are of high quality in terms of education and aptitude, assign them to needed positions, and ultimately transition them voluntarily to civilian life when it is best for them to leave from the standpoint of the Department of the Navy.9 The guiding principles were that the compensation tools support the all-volunteer military, promote flexible workforce management, enhance cost-effectiveness, and support the achievement of strategic objectives. CNA assessed the Navy’s compensation tools in terms of these goals and principles based on evidence from the available literature. The compensation tools that CNA assessed were as follows: • Regular military compensation (RMC), which consists of basic pay, basic allowance for housing (BAH), basic allowance for subsistence (BAS), and the tax advantage that accrues because those allowances are not taxed; and • Special and incentive pays, consisting of enlistment bonuses, selective reenlistment bonuses (SRB), sea pay, and assignment incentive pay; retirement pay, including the retirement annuity for those who serve for 20 years or more, and the newer Thrift Savings Plan (TSP), health care, and the voluntary separation pay program. 9 Under DOD’s nomenclature, a high-quality enlisted recruit holds a high school diploma and scores above the median on the Armed Forces Qualification Test (AFQT), DOD’s enlisted entrance test of cognitive aptitude.

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67 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES The report recommended the most promising tools in the near term and also recommended actions for the long term. Near-Term Recommendations CNA first recommended that the Department of the Navy refrain in the near term from advocating increases to basic pay, military housing, BAH, health care, or retirement pay. However, it recommended that the Department of the Navy pursue initiatives to improve the effectiveness and flexibility of these compensa- tion tools. Second, it recommended an expansion of special and incentive pays, specifically sea pay, SRBs, enlistment bonuses, and assignment incentive pay (AIP). It also recommended that the department begin use of TSP matching and the voluntary separation pay program. Regular Military Compensation The report argues that too little of today’s cash pay can be targeted at specific populations, such as people in hard-to-fill occupations. CNA also found that cash pay is generally inflexible, in that it cannot be turned on and off to help force managers meet specific goals. A similar argument was made by the DACMC. Like the DACMC, CNA argues that the current pay table is not well suited to motivat- ing performance. For these reasons the study recommends reducing the share of compensation devoted to basic pay. The study also finds that the dependency differential for housing allowances is not consistent with the goals of the Navy’s HCS. Like DACMC, it argues that the differential is not cost-effective, because married members are not more pro- ductive than singles. The study sees the annually adjusted housing allowance as a far less flexible and useful tool for dealing with cost-of-living variations than AIP, because AIP can be adjusted at any time and responds to relative preferences for locations as well as geographic variations in the cost of living. Sea Pay The study argues that sea pay promotes the strategic goal of assignment. However, both SRBs and AIP are likely more flexible and cost-effective, because they can be targeted. For example, SRBs are paid to those making retention deci- sions. In the case of sea pay, payments are made to every sailor who goes to sea, regardless of manning shortfalls. Because the payments are made regardless of an individual’s preference for sea duty, the Navy may be paying significant economic rents to those who would go to sea even at much lower levels of sea pay.10 The 10 The term “economic rent” comes from economics and in the case of sea pay refers to the payment above what is required to induce a member to go to sea.

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6 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE study argues that a sea pay that was market-based (like AIP) and that varied by occupation would be more cost-effective and flexible. Selectie Reenlistment Bonuses and Enlistment Bonuses SRBs and enlistment bonuses support the Navy’s retention and recruiting goals. The CNA study argues that they are consistent with the principles of flexibility and cost-effectiveness. The study also argues that both tools could be improved. Today the Navy pays its SRBs through an initial partial lump sum followed by annual anniversary payments. The total size of the bonus is determined as a percentage of the sailor’s basic pay at the time of reenlistment. Because members highly discount future payments, it would be more cost- effective to pay the entire bonus as a lump sum and eliminate the anniversary payments. On the other hand, if anniversary payments are retained, they would be more useful as motivators of performance if the Navy based them on the sailor’s grade at the time of payment, rather than at the time of reenlistment. As for enlistment bonuses, the report argues that many enlistees are unaware of enlistment bonuses. This reduces the power of those bonuses as incentives and therefore waters down their cost-effectiveness. It recommends that the Department of the Navy provide potential recruits with more information about the magnitude of enlistment bonuses. Assignment Incentie Pay Although this program is still in a pilot stage, early indications suggest that AIP has the potential to be a powerful compensation tool and would support the Department of the Navy’s strategic goals. The AIP pilot began in 2003. AIP levels are determined by a market-based system whereby sailors submit bids for the amount of pay they would require to volunteer for less-desired locations. Bids are constrained by limits set by the Navy for each location, and the limits can be changed as staffing shortages become more or less severe. The AIP system is an auction, with the winners being the sailors who submit the lowest bids. (The Navy can take other factors into consideration, for example, whether the individual is approaching a critical decision point.) To date, empirical studies of the program are lacking. The report notes that key issues, such as gaming of the system, remain to be resolved. CNA finds that the program is consistent with the goals and guiding principles of the HCS. Retirement Pay Drawing from past studies, the CNA report concluded that the military retire- ment system is not flexible or cost-effective. For the near term the study recom-

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69 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES mended that the Navy seek out tools to offset the flaws of the system. Specifically, it recommended the Navy consider Thrift Savings Plan (TSP) matching and voluntary separation pay (VSP). For the longer term it recommended that Navy leaders support efforts toward military retirement reform. Health Care Benefits Like the DACMC, the report recommended increasing the share of health care costs borne by members. It also recommended that members and their families be required to decide whether they will use Tricare and which option they will use, to reduce uncertainty about who is using the military system and thus facilitate management of the system. The report found poor alignment between Tricare for Life and the strategic human resource goals of the Department of the Navy, because the costly benefit is deferred so far into the future that it has relatively little effect on recruiting and retention. CNA recommended working in the near term toward repeal of the benefit. TSP Matching The Thrift Savings Plan is a 401(k)-type plan established in the 1980s for federal civilian employees. In recent years military members have been permitted to participate, but the government does not fund matching contributions for them as it does for civilians. A number of studies, including several study groups such as the DACMC and the earlier 2000 Defense Science Board Task Force on Human Resources, have recommended TSP with government matching. The CNA report recommended that in the near term the Department of the Navy begin to use TSP matching as a tool for achieving longer careers by matching the contributions of members with more than 20 years of service. Voluntary Separation Pay Voluntary separation pay is a force-shaping tool that can be targeted to mid- career personnel who would prefer to complete 20 years of service, to induce them to separate before reaching 20 years. The CNA report argues that VSP can help shape the force by facilitating the smooth transition of personnel from ser- vice, and that it is flexible because it can be targeted to individuals with specific occupations, years of service, or other desired characteristics. In the near term the report recommended using VSP to offset the lack of force management flexibility inherent in the military retirement system.

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77 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES already fully staffed. Implementing the new system as an AIP-like auction would save money while reducing the number of involuntary assignments to sea duty. CNA’s recommendations for the timing and calculation of SRB payments also make sense, but this committee is concerned that paying SRB as a lump sum rather than installments poses some risk of default on reenlistment contracts by sailors or marines who have already collected the full payment. The Navy and Marine Corps can limit defaults by pursuing such behavior aggressively. Calculating installment payments based on pay grade at the time of payment rather than at the time of reenlistment will increase the cost of SRBs somewhat, but the committee believes the improved incentive for performance will be well worth the cost. Though all the evidence on AIP is not yet available, this program has the potential to be highly effective as a flexible and efficient compensation tool. The committee recommends early evaluation to identify areas where AIP might be improved. For example, the AIP cap may need to be increased for some especially hard-to-fill locales, such as Hawaii. The committee also recommends extending the AIP concept to other areas of cash pay. The discussion above noted the potential value of changing sea pay to a system like AIP. Chapter 4 outlines a pilot program the Navy might use to evaluate an AIP-like sea pay. A similar idea could be implemented for the sub- marine and air communities. As discussed below, BAH might also usefully be replaced by AIP. Health Benefits Both the DACMC and CNA reports highlight an important inefficiency in the military health care benefit, namely, the crowding out of civilian benefits by Tricare for pre-age-65 retirees. While the premiums for health plans offered by civilian employers have grown dramatically in recent years, Tricare premiums have not been adjusted since 1995.25 Because Tricare’s cost-sharing arrangements are increasingly generous relative to those of most civilian employers, military retirees under 65 years old are turning in growing numbers to Tricare, even though their postmilitary employers offer a health benefit. The net beneficiary of this shift is the civilian employer. According to the DACMC report,26 a retiree with dependents who opts to use Tricare instead of employer coverage saves his or her civilian employer $7,000 a year. After account- ing for copays, deductibles, and premiums, he or she saves $2,500 a year. In fact, 25 Defense Advisory Committee on Military Compensation. 2006. The Military Compensation Sys- tem: Completing the Transition to an All-Volunteer Force, Arlington, Va., April, p. xxvii. 26 Defense Advisory Committee on Military Compensation. 2006. The Military Compensation Sys- tem: Completing the Transition to an All-Volunteer Force, Arlington, Va., April, p. 78.

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7 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE the DACMC reports that some employers actually pay cash bonuses to entice employees to shift to Tricare.27 To address this issue both the DACMC report and the CNA study recommend increasing Tricare fees for retirees under age 65 to be commensurate with the cost- sharing provisions in civilian employer plans. Research shows that individuals are responsive to the price they pay for health care services and prescription drugs. It also shows that copayments are cost-effective in encouraging wise health care spending. Increasing the share of costs borne by military retirees under age 65 would improve cost-effectiveness for DOD and could also reduce the allure of Tricare for members who have civilian health plans available to them. To induce more cost-effective use of health benefits the committee favors some rise in the cost-sharing arrangements. Specifically, copays and premiums should be indexed to the annual cost-of-living adjustment to the military retire- ment annuity. While shifting the cost of coverage from the government back to civilian employers makes good sense, the committee is concerned that asking military retirees to pay the full marginal costs of that shift may not be politically feasible. Retirees are well represented by powerful associations, which argue that those who serve for 20 years or more did so in the expectation that their lifetime health care would be free. Solutions could be made more politically feasible if the costs of health care could be shifted back to civilian employers without raising substantially the costs to retirees. An alternative proposal is to require pre-65 retirees to stipulate a pri- mary and secondary insurer and to give these retirees an incentive to name Tricare as the secondary insurer. That is, just as employers provide retirees with bonuses to choose Tricare, the Department of the Navy could provide retirees with a bonus to choose their civilian employer health benefit instead. The DACMC also recommended that the pre-65 retirement annuity be funded on an accrual basis. This committee endorses that recommendation as a way to improve visibility into the future costs of policy changes. The committee agrees with the DACMC report that in the first year of the change, the top line of the DOD budget would need to increase to offset the effects of this accounting change. For dependents of active-duty members Tricare has three options: an HMO choice known as Tricare Prime and two preferred provider organization (PPO) options—Tricare Extra and Standard. Tricare Prime requires active enrollment, but Tricare Extra and Standard require no enrollment commitment and can be used on a case-by-case basis for each medical need. For example, under Tricare Extra and Standard dependent beneficiaries can seek care at military treatment facilities on a space-available basis or receive care from civilian providers. CNA argues that the absence of enrollment makes it difficult for DOD to manage Tricare efficiently. 27 Defense AdvisoryCommittee on Military Compensation. 2006. The Military Compensation Sys- tem: Completing the Transition to an All-Volunteer Force, Arlington, Va., April, p. xxvii.

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79 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES The CNA report suggests requiring military families to decide whether they will use Tricare and which option they will use. If enrollment is required, open enrollment windows will be needed to allow members to review their choices periodically. Members would also need flexibility to change plans even during closed periods as they rotate from one location to another or as other circumstances change. Given the potential for such turbulence, this committee is unable to assess the degree to which required enrollment would actually improve DOD’s ability to manage the system. Moreover, it is possible that the level of choice inherent in today’s system has a positive effect on morale and ultimately retention. Pay Table Reform and Pay for Performance Both the DACMC and CNA reports recommended restructuring the basic pay table from one based on grade and time in service to one based on grade and time in grade. This committee agrees that a pay table based on time in grade would give individuals who were promoted earlier a pay differential that was persistent and more substantial than one based on time in service. On average the present value of basic pay over a career would be about 3.9 percent higher for members receiving an early promotion under a time-in-grade table, compared with 1.9 percent higher under the current table. Because the Navy promotes personnel faster than average, the comparable figures for the Navy are 4 percent and 2 percent. Consequently a time-in-grade pay table would embed greater pay-for-performance incentives in the promotion system. The committee also believes that a time-in-grade table could potentially accommodate lateral entrants more smoothly. Currently individuals entering with a civilian skill may enter at a higher grade, reflecting higher education, but at years of service 1 (YOS 1). A time-in-grade table that allows individuals to enter at advanced grades could provide entry-level compensation sufficiently high to make military service attractive. Furthermore, prior-service members who left service may consider returning to service if they could reenter at a higher grade. The current time-in-service table, where the clock stops, or even gets reset to the beginning (i.e., to YOS 1) can hinder the reentry of prior-service members with valuable skills. These considerations suggest that a time-in-grade pay table is a good idea, because it would improve the monetary incentive for performance and could sup- port more varied career lengths. The Navy should recognize that there are also other ways to enhance performance incentives. Chapter 2 describes career paths under which individuals might spend more time in a given pay grade. With such alternative paths promotion would not be the main reward for outstanding perfor- mance. An alternative performance evaluation system would need to be designed, linking pay to individual performance not just through the promotion system but also through periodic individual evaluation. The Department of the Navy should

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0 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE investigate an alternative personnel evaluation and incentive system to reward career paths that do not necessarily involve moving up the chain of command. Housing The committee agrees with the finding of the DACMC and CNA that today’s differential in the BAH rate between those with and without dependents is inef- ficient, since members are not differentially productive based on their dependents’ status. The committee also finds that the system encourages early marriages and higher rates of divorce relative to similar civilians according to the DACMC.28 The DACMC argues that eliminating this distinction makes sense, and the most practical approach to doing so will require paying the higher “with depen- dents” rate to those without dependents. The DACMC estimated that across DOD the annual cost of this change in 2005 dollars would be about $500 million. The added cost might be offset by improvements in recruiting and retention due to the increase in military compensation for the average member. Also offsetting the cost would be changes in the composition in the active force toward members without dependents; the more single force would have lower costs associated with health care benefit for dependents, DOD schools, permanent change of station, overseas cost-of-living-allowance, and other costs that increase with dependents. The DACMC estimated that the annual cost savings from these programs would be about $100 million in 2005 dollars. If recruiting improves, fewer recruiters would be needed, providing additional savings. An additional recommendation that would lower incentives for junior enlisted members to form families would be to pay BAH, regardless of the member’s housing arrangement, and charge those living in government housing fair market value for their housing. Junior enlisted living in barracks or onboard ships would receive a net increase in pay because the BAH rate they would receive would be greater than the fair market value for their quarters. This recommendation also makes sense because junior enlisted members would no longer have an incentive to get married in order to receive the BAH rate. For more senior personnel the move would have a neutral fiscal effect because those in government housing would be charged a rental rate equal to their BAH rate. The CNA report recommends replacing BAH with AIP. This recommenda- tion has much merit. AIP accounts for all cost-of-living differences associated with different locales, not just housing costs, and accounts for member prefer- ences. Eliminating BAH is likely to be politically difficult because it involves 28 JeffreyS. Zax and David Flueck. 1995. “Marriage, Divorce, Income and Military Marriage Incen- tives,” 1995 discussion papers in Economics, Center for Economic Analysis, Department of Econom- ics, University of Colorado at Boulder, May. Available at . Accessed on October 5, 2007.

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1 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES coordination with the other services. The other services do not yet have AIP and a voluntary assignment system. Thus, they are not yet set up to eliminate BAH. The committee recommends that Department of the Navy leaders support the replacement of BAH with AIP. The committee agrees with recommendations to consolidate family separa- tion pay with other special and incentive pays related to deployment. Deployment pay should reflect the arduous nature of deployment and the potential for extra expenses, rather than arbitrary distinctions between members with and without dependents. quality of Life Quality-of-life (QoL) programs encompass a diverse set of benefits, typi- cally provided in kind as subsidized goods and services rather than in cash. They include recreation programs, day care centers, commissaries, family support centers, educational assistance, and programs to address issues related to spouse employment and children’s education. These programs help maintain morale and mitigate the unique demands of military service, including the requirement that members and their families be on-call at all times, endure separations, and cope with frequent long-distance moves. Given scarce resources, finding the right balance between cash and in-kind benefits is a challenge. On the one hand, a compensation system that will meet the demands for readiness and capability in an expeditionary military is not likely to be one that is founded on paternalism. On the other hand, in-kind benefits may improve staffing and readiness. For example, fitness centers might make sailors and marines more productive; tuition assistance might help the services selectively attract and retain enlistees who are smart and motivated to achieve; and high-qual- ity child care centers might free members from on-the-job concerns about their young children. In-kind benefits are also often less economically efficient than cash, in that they cost more to provide than members would be willing to pay for them. Yet in-kind forms of compensation may actually be more efficient than cash in some cases. For example, the Department of the Navy may be able to take advantage of economies of scale and purchase some benefits at a lower cost than if each sailor and marine bought them independently. The DACMC recommended devoting more effort to measuring and evaluat- ing the costs and effectiveness of QoL programs. It called for developing metrics with care, however, because the small scale and geographic heterogeneity of many of these programs can make it difficult to measure their effects on readiness. One presentation provided to the committee from the Commander, Navy Installations Command, Fleet and Family Readiness, suggests that the Navy is

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2 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE now using metrics routinely to track QoL programs.29 Such tracking is a very good start. Unfortunately, however, it is often difficult based on such tracking to distin- guish improvements that are sparked by deliberate policy changes from those that would have occurred anyway under the status quo policy. The committee recom- mends that the Department of the Navy also undertake more formal evaluations that involve baseline control groups and control periods. Such evaluations could help the services to assess the relative cost-effectiveness of various programs and improve understanding of the trade-offs among them. The DACMC singled out spouse employment and children’s education as areas of special interest. Increased choice through assignment, such as through the AIP, can help address these issues. In such areas as Hawaii where the qual- ity of public schools makes assignments a particularly poor choice for families, AIP caps may need to be increased above the current limit, and other measures may need to be taken to increase the attractiveness of Pearl Harbor. The Navy has expanded construction of child care centers throughout the country. In areas where jobs are plentiful this step may help in the area of spouse employment, although it also further increases the benefits package for members with families relative to that of singles. CNA also recommended introducing a cafeteria plan that would give mem- bers a choice between cash and a menu of qualified (nontaxable) benefits, includ- ing health care, child care, and life insurance. One way to implement this approach in the near term is to allow members to set up a flexible spending account where they could set aside pretax dollars for dependent care and other qualified expenses like health care. The committee believes additional research is needed to deter- mine the benefits and costs of a military flexible spending account, taking into consideration the effects on the Department of the Navy’s ability to attract and retain personnel to meet its requirements, and any offsetting costs associated with reduced economies of scale in the provision of in-kind benefits. Reserve Compensation The DACMC recommended that activated and mobilized reservists earn the same pay as active-duty members, that active and reserve compensation be coor- dinated in a systems approach, and that the reserve components be given a new flexibility to set bonuses by geographic area and unit to reflect the location-spe- cific nature of manning reserve units. The first recommendation addresses equity concerns while the second two recommendations address force management and flexibility of compensation. All three recommendations support the compensation 29 John Baker, Head, Fleet and Family Readiness Directorate, Navy Installations Command, “Navy Family Center–Manpower and Personnel Benefits,” presentation to the committee, November 14, 2006, Washington, D.C.

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3 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES goals and so seem sensible in terms of the supporting total force objectives of the Department of the Navy. Followed blindly, the first recommendation can lead to policies that run coun- ter to the Department of the Navy’s compensation goal of cost-effectiveness. For example, active and reserve members have different retirement systems. Several proposals before Congress have recommended changing the reserve retirement system to mirror the active system, including lowering the age at which reservists can begin earning retirement benefits, which is currently 60. Research shows that such a policy would increase cost but would do little to improve retention.30 The committee generally favors changes that would bring the immediate cash pay of reservists serving on active duty in line with that of their active-duty counterparts. In some instances, however, the committee finds that compensation differences make sense in light of the unique missions of the two components. The committee strongly supports location-specific bonuses for reservists. The committee finds that changes to the reserve retirement system should generally be made in the context of overall military retirement reform. Proposals for changing reserve retirement outside of such a context should be examined on a case-by-case basis to determine the likely costs as well as the potential contri- butions toward Department of the Navy human resource goals for the active and reserve components. Studies of the Effects of Deployment on Service Members Long and frequent deployments associated with the wars in Iraq and Afghani- stan are raising concerns about the relationships among work pace, stress on the force, morale, and retention. Recent research provides some insight, but the Department of the Navy needs additional information. Past research indicates that individuals’ attitudes toward service worsen when the amount of expected deployment differs from preferred amounts. Evidence from the 1990s shows that deployment has a positive effect on reenlistment for most military members: reenlistment is higher for personnel with some deploy- ment than for personnel with no deployment. However, when individuals reach three or more deployments, reenlistment probabilities drop somewhat.31 A similar result is found for officers. Past studies of the Navy find that the more sea duty a sailor expects in his or her next term, the less likely he or she is to reenlist or 30 Beth J. Asch, James R. Hosek, and David S. Loughran. 2006. Resere Retirement Reform: A View- point on Recent Congressional Proposals, RAND Corporation, TR-199-OSD, Santa Monica, Calif. 31 See James Hosek and Mark Totten, 1998, Does PERSTEMPO Hurt Reenlistment? The Effect of Long or Hostile PERSTEMPO on Reenlistment, RAND Corporation, MR-990-OSD, Santa Monica, Calif.; James Hosek and Mark Totten, 2002, Sering Away From Home: How Deployments Influence Reenlistment, RAND Corporation, MR-1594-OSD, Santa Monica, Calif. A similar result is found for officers; see Ronald Fricker, 2002, The Effects of PERSTEMPO on Officer Retention in the U.S. Military, RAND Corporation, MR-1556-OSD, Santa Monica, Calif.

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4 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE extend. However, increases in sea pay can offset negative retention effects of sea duty.32 Heidi Golding finds that a $50 increase in total monthly sea pay results in an 11 percent increase in the completion of 48-month sea tours.33 Only one study has looked at information post-9/11, and this study is based on focus group and survey data from all services and from both officer and enlisted personnel.34 The study provides information on retention intentions only and not on actual retention behavior. Still, it is suggestive of some initial insights. The study finds that active-duty members who report higher than usual work stress have a higher intention to stay in the military, suggesting that these indi- viduals are engaged in meaningful work that, though demanding, is satisfying. Specifically, those who had the usual amount of work stress had a 22 percent likelihood of stating they were likely or very likely to stay in service versus 43 percent of individuals who stated they had much more than usual stress. On the other hand, the survey data show that more individuals are working longer than the usual duty days, among both deployed and nondeployed personnel. In addi- tion, they are under more than the usual work stress, and the survey data indicate that those who work longer days have a lower intention to stay. It appears that the negative effect of longer days is not sufficiently negative because, as mentioned, those under more than usual work stress have a higher intention to stay. This suggests that those who are working more frequently under unusual stress find that the work is sufficiently gratifying, perhaps because it supports a meaningful mission, that it offsets the negative effects of longer days on the intention to stay. The study also finds that unusual work stress is lower when members feel that they and their units are well prepared. The results of this study indicate that increases in unusual work stress and long work hours interact in complex ways with intentions to stay. The Depart- ment of the Navy needs to understand how unusual stress levels, work pace, and deployment schedules are affecting morale, performance, and retention. FINDINgS AND RECOMMENDATIONS The following findings and recommendations are those of the committee based on its review of the prior studies. 32 Heidi Golding with David Gregory. 2002. Sailors’ Willingness to Complete Sea Tours: Does Money Matter?, Center for Naval Analyses, CNADRM 00006886/Final, Alexandria, Va., December. 33 Heidi Golding with David Gregory. 2002. Sailors’ Willingness to Complete Sea Tours: Does Money Matter?, Center for Naval Analyses, CNADRM 00006886/Final, Alexandria, Va., December. 34 James Hosek, Jennifer Kavanagh, and Laura Miller. 2006. How Deployments Affect Serice Members, RAND Corporation, MG-342-RC, Santa Monica, Calif.

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5 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES Deployment and Pace of Work Finding: Recent and planned changes in Navy and Marine Corps missions, unit structure, and materiel will likely have adverse effects on people and readiness. Studies based on surveys and focus groups indicate that whether service members are deployed or at home, their morale and intention to continue in ser- vice appear to suffer when work hours are unexpectedly onerous, and when the realities of military life differ substantially from the individuals’ expectations. The wars in Iraq and Afghanistan, other worldwide deployments and commitments including the global war on terror, and the continual downsizing of the Navy pose the potential for adverse effects on people and readiness. While such effects may ultimately be ameliorated by the introduction of labor-saving technologies, they are exacerbated when workloads increase because the fielding of or training on new equipment lags behind the personnel reductions. Moreover, the challenges of irregular warfare, the continued shifting of shore work to contractors, and the Navy’s plans to move from a pyramidal to an oval workforce structure (discussed in Chapter 2) are likely to lengthen work days for many sailors and marines. If individuals are overloaded beyond their ability to support the mission, both mis- sion readiness and future retention are likely to suffer. Recommendation: The Navy and Marine Corps need better evaluation programs to measure and interpret the effects of changes in workload, separation from home, length and repetition of deployments, and similar factors on readiness, morale, and intention to serve. The Assistant Secretary of the Navy for Manpower and Reserve Affairs, the Chief of Naval Personnel, and the Deputy Commandant of the Marine Corps for Manpower and Reserve Affairs should develop new metrics for the early identification of morale and retention signals related to deployment cycles, workload, and manning levels. Additional studies should be undertaken to understand better how deployment cycles, workload, morale, intention to con- tinue, and actual continuation are related. Compensation and Retirement Reform Finding: The current package of immediate compensation is overly complex, lacks flexibility, is not conducive to Navy and Marine Corps force management, and generally costs more than its value to service members. Recommendation: The Secretary of the Navy, the Chief of Naval Operations (CNO), and the Commandant of the Marine Corps (CMC) should support the following DOD-wide policy changes:

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6 MANPOWER AND PERSONNEL NEEDS FOR A TRANSFORMED NAVAL FORCE • Improve incentives for performance by reconfiguring the basic pay table to set pay based on grade and time in grade rather than time in service. • Equalize the basic allowance for housing (BAH) rate for all service mem- bers, regardless of family status. • Pay BAH to all service members and charge rent to those in government housing, with the rent equal to the fair market value of their housing. • Consolidate all deployment-related pays, including the family separa- tion allowance. Deployment-related pay should be set to reflect the nature of deployment. • Consolidate the special and incentive pays into a much smaller number of categories, and work actively to help shape the categories to make these pays as flexible and useful as possible. In doing this, give particular attention to assign- ment and career incentive pay and selective reenlistment bonuses to best match the interests of sailors and marines with those of the services. Assuming that the broader pays are instituted, naval leaders, including personnel and budget offices, should make every effort to avoid “cost creep” as individual constituencies lobby for pay increases. The CNO and CMC should direct that rigorous evaluations of the services’ quality-of-life programs be carried out to understand their effects on readiness and ensure their cost-effectiveness. The leaders should also conduct research to assess the costs and benefits of flexible spending accounts for these programs, including health care. Finding: The current military retirement system impedes flexible force manage- ment and is inequitable and inefficient. In addition, health care benefits for mili- tary retirees are not cost-effective. Recommendation: The Secretary of the Navy (SECNAV), the Chief of Naval Operations (CNO), and the Commandant of the Marine Corps (CMC) should advocate and support changes to the compensation system that would accomplish the following: • ncourage longer careers for some personnel and shorter careers for E others. • Offer greater flexibility in management of active and reserve forces. • Result in more personnel who are vested. • enerally provide more compensation up-front and less deferred to G retirement. • Improve integration of active and reserve forces. A three-part system seems the most promising in terms of effectiveness and political feasibility. Such a system would consist of the following:

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7 SUMMARY AND ASSESSMENT OF PREVIOUS STUDIES • An entitlement that allows members to accumulate benefits for old age, • A career management tool for the services, and • dditional front-loaded compensation that would also serve as a manage- A ment tool. The SECNAV, CNO, and CMC should also support a proposal that would require retirees under age 65 to stipulate a primary and secondary insurer, and that would give these retirees an incentive to stipulate Tricare as the secondary insurer. To induce more cost-effective use of health benefits, Tricare fees should be indexed to the annual cost-of-living adjustment to the military retirement annuity. Finally, the financing of the under-65 health benefit should be through an accrual fund, as it is for retirees over 65. Finding: The reserve compensation system does not support the new role of the reserves as an operational force, nor does it consistently support the unique features of the reserves. Recommendation: In general, the Department of the Navy should support poli- cies that provide activated reservists with the same compensation as active-duty members, in equally ranked groups. But this should not interfere with other goals of providing compensation such as recruiting, staffing, achieving cost-effective- ness, and maintaining flexibility. The Department of the Navy should support the creation of a retention bonus that can depend on location or unit, reflecting the fact that reserve units draw manpower from local labor markets.