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Summary of "Retention, Incentives, and DoD Experience Under the 40-Year Military Pay Table"

Core Content

This report examines the effectiveness of the 40-year military pay table as a retention tool and evaluates whether reverting to the 30-year pay table would be equally effective. It was commissioned by the U.S. Department of Defense (DoD) in response to the Senate Armed Services Committee (SASC) request following the FY 2015 National Defense Authorization Act (NDAA).

Main Objectives

• Assess whether the 40-year pay table is still necessary for retaining experienced military personnel.
• Evaluate the potential impact of reverting to the 30-year pay table on retention and associated costs.
• Analyze the effects of the 2007 and 2014 pay table changes on military retention.
• Explore the theoretical basis for military compensation structures and their implications for retention.

Key Findings

1. Trends in Senior Personnel Retention

• The number of active-duty personnel with more than 30 years of service increased by 58% from 2007 to 2014, from 4,175 to 6,583.
• The largest increases were among enlisted personnel, particularly E-9s, and senior field grade officers (O-4 to O-6), which increased by nearly 50%.
• General and flag officers (O-7 to O-10) showed only a 6.5% increase, indicating that the 40-year table had a smaller effect on this group.
• The trend suggests that the increase in senior personnel after 2007 was part of a longer-term shift, not solely due to the pay table change.

2. Interview Insights

• Both the 30-year and 40-year pay tables were found to be effective in meeting retention goals.
• Experts emphasized that senior personnel are retained due to strong commitment, not just because of pay incentives.
• Reverting to the 30-year table was viewed as undesirable due to potential negative impacts on morale and perceptions of military compensation stability.
• The 40-year table provides greater flexibility for longer careers and is preferred by many for its role in improving readiness and personnel management.

3. Dynamic Retention Model (DRM) Results

• Reverting to the 30-year table would adversely affect retention, especially among personnel with more than 30 years of service.
• To sustain retention under a 30-year table, special pay would be required:
  • Officers: $87,900 to $99,600 at YOS 30.
  • Enlisted Personnel: $37,400 to $58,200 at YOS 30.
• The DRM estimates that this special pay would result in cost savings of about $1.2 billion for the active component.
• The cost of maintaining the 40-year table is relatively small, leading to a 1.1% increase in active-component personnel costs compared to a 30-year table with special pay.

4. Economic Theory and Compensation Structure

• Economic theory supports skewed compensation structures, where pay gaps between ranks increase with grade.
• This skewness is necessary to offset factors that discourage retention and effort, such as:
  • Difficulty in measuring performance at higher ranks.
  • Homogeneity of the talent pool in senior ranks.
  • Declining future promotions and pay increases.
• The theory also suggests that nonpecuniary benefits (such as job satisfaction and commitment) are more valuable to senior personnel, reducing the need for large pay increases.

5. Implications of Reverting to the 30-Year Table

• Reverting to the 30-year table would affect 58% more personnel than before 2007, potentially worsening perceptions of compensation value.
• It could lead to lower morale among military personnel and their families.
• The report concludes that the 40-year table is preferable for maintaining retention and readiness, and that special pay is a viable alternative if the 40-year table is not continued.

Key Information

• The 40-year pay table was introduced in 2007 to incentivize longer careers and reward experience.
• The 40-year table includes longevity increases beyond YOS 26 for:
  • Officers (O-6 and above)
  • Warrant officers (W-4 and W-5)
  • Enlisted personnel (E-8 and E-9)
• The 40-year table also removed the cap on basic pay for computing retired pay, increasing retirement benefits.
• The Dynamic Retention Model was used to simulate retention behavior and associated costs under different pay table scenarios.
• The report highlights the complex relationship between pay structure, retention, and personnel management.

Conclusion

The 40-year pay table has been effective in retaining senior personnel, and reverting to the 30-year table would likely have negative consequences unless supplemented with additional special pays. While the 30-year table could be as effective with appropriate incentives, the 40-year table is generally preferred for its role in maintaining morale, readiness, and personnel flexibility. The cost of the 40-year table is relatively low, making it a cost-effective solution for retention.