Yes, Raise Military Pay. Just Do It Cleverly

In the past two decades, both the civilian sector and the military have come to rely more on computer and other high-tech skills. However, the military-civilian pay gap for highly skilled persons widened greatly as the booming American economy increased civilian pay much more rapidly than military pay. As a result, it has become much harder for the armed forces to retain skilled men and women: In the 1990s, retention rates fell in all categories.

This skills gap seriously undermines U.S. defense capabilities. That's why the incoming Bush Administration's commitment to raise military pay should be directed mainly toward overcoming the shortage of technically trained personnel. By making a few key changes in pay and recruitment policies, the U.S. armed forces would be better prepared for modern warfare.

High turnover of skilled employees creates problems for all organizations, but it is especially costly to the military because the armed forces offer free training to attract good quality recruits. Each of the services provides training in hundreds of categories, investing hundreds of thousands of dollars in training their most highly skilled men and women. Yet, many of those trainees leave the services after a single term, or about five years, and some leave for special reasons even before the first term is completed.

In particular, reenlistment rates have plummeted for better-educated and extensively trained recruits, who have skills that are highly valued by private companies. While a little over half of all first-termers reenlist, this drops to just 30% for Navy and Air Force pilots, and it is even lower for some other highly skilled personnel. Military pilots and technicians are snapped up by commercial airlines and other civilian companies immediately after they leave the service.

Obviously, one possible solution is to increase the financial compensation for people with the most desirable skills. Unfortunately, it is difficult for the armed forces to pay different salaries and benefits to personnel of the same rank and years of service. But bonuses can and do differ, and most recruits, who tend to be in their early years of setting up households, greatly value lump-sum payments, since they can be large enough to bring houses and cars within reach.

The Army, Navy, and Air Force already try to cut turnover of their well-trained personnel by offering bonuses when they reenlist after first or second terms. Some of these bonuses amount to more than $100,000, usually spread over several years. However, in order to raise reenlistment to decent levels, given the huge gap with civilian pay, bonuses need to be increased further to pilots, computer specialists, and other highly skilled personnel who are in strong demand by private companies.

It also should be pointed out that it is easier for the military than for civilian companies to provide up-front bonuses. In civilian life, companies may have little legal recourse if new employees with large signing bonuses decide to quit after a short time on the job. Military personnel who receive bonuses, by contrast, cannot leave until their term is over.

PRETRAINED. Similarly, the military should take greater advantage of its unique ability to pay for education and training without fear that recipients will take a better offer as soon as they've acquired new skills. Already, the armed forces attract officers by supporting their college education through ROTC and other programs if students commit to serving afterwards on active duty. This policy could be expanded to noncommissioned officers by paying the cost of learning computer and other technical skills in the civilian sector, again contingent on an obligation to serve after completing training.

But these steps alone will probably not be enough to close the military skills gaps. The armed forces should consider taking a more novel approach by offering bonuses to attract first-term enlistees who already possess desirable high-tech skills. These bonuses, too, would depend on the length of the enlistment and the pay gap between the military and private companies. Recruitment of trained personnel would help reduce the military expenditure on training and also help the armed forces absorb the latest civilian technological developments. This approach lowers the burden to the military when skilled persons fail to reenlist, since trained replacements could be recruited.

Of course, nonmonetary incentives also matter. Military surveys indicate that family concerns and low morale are important reasons for low reenlistment rates. Military life, with its frequent relocations, can prove to be a strain on marriages, but poor morale should improve with the Bush Administration's commitment to upgrading weapons and pay.

Changing the military pay system won't be easy. But without skilled personnel trained in electronics and other technical skills essential to modern warfare, the U.S. armed forces will be less prepared for future global confrontations.

Before it's here, it's on the Bloomberg Terminal.