The military’s current pay system compares very well against what most uniformed service members could be making in civilian life, but the system could still use some tweaks to ensure recruiting and retention are strong in future years, according to the latest edition of a detailed Pentagon review on military pay.

The Quadrennial Review of Military Compensation, published Wednesday, found pay for enlisted military members currently stands at the 83rd percentile of what private sector civilian employees with similar education levels earn. Officers are at the 76th percentile, according to the report.

The release of the QRMC, which has been in the works for the past two years, comes just two weeks after a substantial pay raise for junior enlisted members took effect. Since Congress did not enact the 14.5% increase until near the end of the review cycle, the study did not take that targeted raise into account.

However, the authors made clear they would not have recommended that Congress enact it.

“Basic pay is a blunt and costly instrument and most prudently deployed only when there are systemwide problems, such as both widespread retention and recruiting shortfalls, which cannot be solved more efficiently with other policy instruments,” according to the report. “Although many of the proposals analyzed by the QRMC result in a more ideal pay structure, those goals are achieved only at a higher cost. Recent retention is strong, recruiting has significantly improved, and favorable comparisons between military and civilian pay suggests that levels of basic pay are more than adequate.”

Increase in pay benchmark

The report did not suggest, however, that the relatively high levels of compensation compared to the private sector are inappropriate, considering the demands of military service. Rather, the review team said policymakers should target military pay at around the 75th percentile of civilian pay. That’s an increase from the 70th percentile that previous QRMCs had recommended and leaves the average officer’s compensation just above the new benchmark.

“We will certainly be monitoring that to see if we need to make any sort of additional adjustments to officer basic pay moving forward to maintain recruiting and retention objectives,” a senior Defense official who spoke to reporters on the condition of anonymity told reporters. “Beyond adjusting the benchmark, we’ll also look at new methods of lateral entry so that we can recruit especially and retain especially critical skills, such as in the medical or cyber and other domains.”

Under current DoD policy, “lateral” entrants — those entering military service after already having established careers in in-demand fields — can join the military without starting at the bottom of the pay scale. But that approach to “constructive credit” only accounts for rank, not the time-in-service criteria that also leads to higher pay in the military system. Under one of the QRMC’s proposals, lateral entrants would also receive credit for years of service in the civilian sector.

The new review, like previous QRMCs, did not consider the value of benefits, such as health care and retirement, and only examined cash compensation: military pay, allowances and bonuses.

But the review also recommended updates to DoD’s largest piece of cash compensation outside of basic military pay — the tax-free basic allowance for housing (BAH) that service members receive when they live outside the gates of a military base.

Possible reforms to housing allowances

The authors found that in almost every pay grade, the BAH rates paid to service members are greater than what “comparable” civilians pay for rent and utilities in the same housing markets, outpacing those expenses by between 17% and 60%, depending on the members’ location.

Nonetheless, the QRMC said DoD should examine options to make the BAH rates more predictable and reduce “perceived inequities” between ranks and geographic locations.

One option under consideration is to replace the six static “housing profiles” DoD uses to determine market rates for rent in each of its more than 300 housing areas. Currently, those six profiles include apartments, townhomes or houses, with each profile pegged to a rank. But not all of DoD’s “profiles” are abundant in all of its housing markets.

“What we generally find is that throughout the country, we’re not finding a lot of two-bedroom town houses, and so we do a lot of work to make sure that we’re calculating appropriately what that would look like in various different military housing areas across the country, but we think it’s appropriate to modernize based upon number of bedrooms,” the Defense official said. “What the analysis also took a look at is that sometimes there’s a view that a town house may be less desirable or less expensive than a detached home, but depending on the area that you’re living in, we have a lot of luxury townhomes that are being built that are often even more expensive than detached single-family homes. Part of that is location, location, location. And so we want to make sure that we’re taking the changes in the overall rental market into account as we are setting BAH rates.”

Role of dual-income households

The latest QRMC is the first such review to account for the role military spouses — and their incomes — play in retention decisions. Overall, the study acknowledged that frequent deployments and cross-country moves tend to make employment more challenging for spouses, but found that on average, relatively-high military compensation offsets spouses’ lost income.

Nonetheless, the review suggested that policymakers consider adding new forms of non-cash compensation for spouses to increase the likelihood that military families will continue to serve.

For example, one recommendation is aimed at the fact that frequent moves make it difficult for spouses to stay in one job for long enough to become vested in an employer’s 401(k) plan.

“We’re recommending that Congress work with us to allow these military spouses to keep everything in their 401k plan regardless of vesting requirements,” said another senior Defense official. “And we try to incentivize that by providing a tax incentive to the employers to do that. It’s currently allowed for small employers, less than 100 employees. They get the tax credit if they do that for military spouses. But we would like to see that expanded more broadly so it would cover all military spouses.”

And overall, the report recommended that DoD do more to examine other non-cash incentives that help drive recruiting and retention decisions.

Although the QRMC only considers cash compensation in its analyses, the authors said DoD itself should do more to communicate the value of the other benefits offered to service members and families.

“While the QRMC found overall strength in the total compensation package, this does not seem to translate to service member satisfaction with military pay,” the authors wrote. “A communications campaign initiated from QRMC results could inform service members about how total compensation compares with that of civilian options. This campaign would focus on key points of a military career, such as recruitment or retention decisions. It would also clarify key concepts, such as regular military compensation. Finally, building on the work of some QRMC studies, the campaign could be targeted at an individual level to include education on certain special or incentive pays.”

Separately, the report recommended the department start conducting a separate review — released two years after each QRMC — that specifically examines quality of life issues that are separate from compensation.

“I think many people are familiar with the work that was done on the Congressional side with the quality of life review, and we did find that work helpful,” said the first Defense official. “There’s value in periodically reviewing those quality of service factors in a similar manner to what we do for the QRMC. That way the department senior leaders can holistically take a look at where that next dollar should be spent. Is there value in investing that dollar in additional cash compensation, or will we get a better return on investment if we put that next dollar into things like barracks, childcare, military spouse employment efforts, things like that?”

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