August 1, 2008  

Expensive bait

Recruiting and retention costs are soaring, but do they work?

The Defense Department faces daunting responsibilities to meet military personnel requirements, just as it did in past periods of extended military operations, and it finds itself in a position of having to respond to needs by employing a number of financial incentives and programs, sometimes very costly ones.

Although it is laudable that the Defense Department has been as successful as it has in terms of meeting overall end-strength goals through its myriad recruiting and retention programs, it seems only prudent to recognize that today’s budget dollars are not unlimited, and that it is important to be fully aware that significant financial cost is associated with these incentives.

Just as the Defense Department made significant changes to its military personnel system based on lessons learned after past periods of heightened operations — such as moving from the draft to an all-volunteer force after Vietnam — the department presumably will respond to lessons learned from current operations in Iraq. What follows are some observations from the Government Accountability Office’s work that might shed some light for the Defense Department as it moves ahead.

Overall, the Defense Department has been compelled to spend millions more than it used to spend to attract, pay and retain its personnel. And although the department seems to be attracting and retaining the numbers of personnel it needs, it really does not know whether it is getting the most for its money. I will focus on three areas with regard to the overall effectiveness of the Defense Department’s military compensation system:

1. Transparency over rising military personnel costs.

2. The mix of cash, benefits and deferred compensation.

3. The cost of enlisting military personnel.

Transparency over military compensation is critical because costs to provide compensation are substantial and rising. For example, GAO found that the total military compensation for the active and reserve components increased from about $147 billion in fiscal 2000 to $195 billion in 2006 — about 33 percent. Per capita costs for active-duty personnel rose from about $96,000 in 2000 to more than $126,000 in 2006. For part-time, drilling reservists, the per capita cost nearly doubled from $10,000 to about $19,000 during the same timeframe. For active-duty personnel, the major causes for this increase were that basic pay increased 23 percent, allowances for housing increased 66 percent and health care costs increased 69 percent. For the reserves, the cost of re-enlistment bonuses increased 1,000 percent, health care for full-time reservists increased 29 percent and health care for reserve retirees more than tripled.

Although the cost of the Defense Department’s compensation packages has soared, we found that it is extremely difficult to track the rise in these costs in the U.S. budget. No single source exists to show the total cost of military compensation for either active-duty or reserve personnel. This cost has to be tracked in at least six places in the federal budget. First, a large amount can be found in the Defense Department’s military personnel account in the form of basic pay, housing and subsistence allowances, and retirement pay. Second, the department’s operations and maintenance account includes the cost of dependent schools; morale, welfare and recreation programs; and health care for active-duty service members. The third place you need to look is in the Defense Department’s Future Year’s Defense Plan, which lists the cost of family housing upkeep and utilities. Fourth, the Department of Veterans Affairs’ budget contains amounts that are spent for Montgomery GI Bill benefits and the Guaranteed Home Loan Program. Fifth, you need to examine the Department of Education’s budget to find how much is spent for local community schools affected by military dependents. And sixth, you need to look in the Department of Labor’s budget to find out how much is spent on employment assistance.

Finally, after all that, you find that some Defense Department compensation costs are not tracked in any budget: For example, nowhere is there a recording of the cost of compensation and benefits for future veterans’ benefits or the health care for retirees younger than 65 and their dependents. The lack of transparency makes it difficult to make fact-based decisions about the efficiency and effectiveness of adjustments to the compensation system and, in broader terms, informed trade-offs among competing demands.

As we did our work on the Defense Department’s compensation packages for active-duty and reserve and Guard personnel, we found that the percentage of these packages that came in the form of cash was substantially smaller in relation to the percentage that came in the form of benefits than it was in private industry. For example, we found that for active-duty service members, in fiscal 2006, 48 percent of their compensation package was cash, 21 percent was noncash benefits and 31 percent was deferred benefits. For reserve members in 2006, the figures are the same. We found that private industry, on the other hand, placed a much higher percentage of its employees’ compensation in cash: 82 percent came in the form of salary, and 18 percent in the form of benefits. We found that the Defense Department’s comparatively higher reliance on deferred benefits did not make sense, however, when examining the makeup of the majority of its employees. Studies have shown that cash today is generally a far more efficient tool than future cash or benefits for recruiting and retention. Reservists, in particular, are not likely to be attracted by deferred benefits: Fewer than one in four of them stay in the service long enough to receive deferred benefits. The Defense Department did not have the tools to determine the mix of cash and benefits that would most appropriately and cost-efficiently compensate its personnel in a way that was competitive with private industry.

Just as the cost of compensating military personnel has grown, so has the cost of enlisting them in the first place. The cost per recruit (which includes the cost of advertising, paying recruiters and awarding enlistment bonuses) has more than doubled over the past 20 years, rising steadily from about $7,000 in 1985 to more than $16,000 in 2005. Total bonus expenditures rose from $24 million in 1995 to $279 million in 2005. Despite these expenditures, however, the Army missed its 2005 enlistment goal by 6,627 recruits — 8 percent of its annual mission. Since that time, the Army and the other services have been more successful in meeting their recruiting missions. But meeting these missions has come by further increasing recruiting costs. In past work, GAO has commented on the fact that the Defense Department has not been able to point to which of its recruiting expenditures work relatively better than others, and made recommendations that the department define tools that would enable it to measure return on investment. However, the Defense Department has made little progress in this area and still cannot determine the most cost-effective mix of recruiters, bonuses and advertising.

Further, GAO’s past work on the department’s use of selective re-enlistment bonuses to retain the personnel in most critical need has shown, similarly, that the Defense Department does not have ways to measure the relative effectiveness of its various incentives. The Defense Department knows only that in the aggregate it gets the retention numbers it needs, even if it means that bonuses go to many people who would have stayed in the service anyway or who are in occupations that are not in critical need. Even as early as 2001, we found that the amount of money the department was spending on re-enlistment bonuses was rising substantially. Between fiscal 1997 and 2001, the total number of enlistees who received bonuses more than doubled — from 23,000 to almost 59,000. The average bonus paid during that period rose from $5,500 to $8,000, and the bonuses are now even higher.

Despite the significantly higher amounts of money the Defense Department spends on re-enlistment bonuses, work GAO completed in 2006 showed the department still had occupations that were consistently overfilled and underfilled. For example, between fiscal 2002 and 2005, 19 percent of the department’s 1,484 occupational specialties were consistently overfilled, and 41 percent were underfilled. Defense Department officials at the time admitted that for the previous five or six years, the active components sometimes paid financial incentives to service members in occupational specialties that were consistently overfilled. They said this occurred in part because the department was legislatively required to meet mandated aggregate personnel levels. As a result, some money that was spent for re-enlistment bonuses did not really need to be spent. Better targeting of these bonuses would have ensured that the money spent for this purpose was more likely to result in meeting the Defense Department’s most urgent needs.

The military services have demonstrated that they can, within reason, meet their overall end-strength goals. However, a common theme through our work has been that despite the Defense Department’s success in meeting its quantity goals, it is becoming more and more important for the department to target its expenditures to ensure that they are directed toward “needs” vs. “wants” and are as cost-effective as they can be. Especially in periods of tight fiscal constraints, it is imperative that the Defense Department, to receive the most significant return on investment, direct its financial resources to its most critical needs. Further, costs that need to be considered are not limited to dollars alone. It is also important for the department to consider not only the numbers of personnel it recruits and retains, but also the quality of those forces, and any effect a decline in the quality of the forces may have on the Defense Department’s ability to meet its mission. As has been widely reported, the Army has made adjustments to its age eligibility limitations and increasingly is relying on waivers to other standards to meet its recruiting missions.

GAO has ongoing work that will examine the various steps that the Army, in particular, is taking to keep quality levels from declining further. We believe it behooves the Defense Department, as it moves forward, to examine the quality factors, as well, to take its increasingly scarce resources and ensure that they are spent as precisely and cost-effectively as they can be. This will require more and more sophisticated marketing tools to find ways to measure the return on the department’s many investments.

BRENDA FARRELL is director of defense capabilities and management at the Government Accountability Office.