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A new study on military compensation finds that service members' pay and benefits compare favorably with their civilian counterparts, but the Pentagon needs to find a better way to reward top performers and those with high-demand skills.

"There's a lot more to military compensation" than pay and housing allowances, said Jan "Denny" Eakle, director of the 10th Quadrennial Review of Military Compensation. By law, the Defense secretary must convene a commission every four years to assess how effective pay and benefits are in recruiting and keeping top service members.

The commission released the first volume of its ongoing study--on cash compensation--Wednesday at the Pentagon.

The economic implications of the study's findings are significant. Military personnel costs make up 23 percent of defense spending; last year, they topped $118 billion.

The commission found that the average enlisted member earned about $5,400 more in 2006 than his or her civilian counterpart when comparing cash compensation, and $10,600 more when selected benefits were included. The typical officer received an average of $6,000 more than civilians with comparable education and experience in cash comparisons, and $17,800 more with benefits included.

Commissioners found that both officers and enlisted members are paid at a level commensurate with the 70th percentile of salaries for civilians with comparable education and experience. When benefits, such as housing and food allowances and tax advantages, are calculated as part of a broader picture, compensation levels are near or exceed the 80th percentile for private sector workers.

Few service members fully understand how their pay and benefits stack up against their civilian counterparts, Eakle said, because the Defense Department's method for calculating comparisons is flawed.

According to Eakle, the current metric used by the Pentagon fails to calculate the value of military members' state tax benefits, avoided out-of-pocket medical expenses and FICA tax advantages. The commission recommended that the Pentagon refine its method for calculating comparisons and establish the 80th percentile as the new standard for pay.

Additionally, the military compensation system needs to do more to reward outstanding performers, the panel found. It noted that the existing system rewards performance primarily through promotion, which advances service members in rank, thus tying compensation more closely to years of service than to actual performance.

Even members who receive early promotions find the financial benefits short-lived because the higher pay associated with early promotion is not sustained after the point at which an on-time promotion would have occurred. The system also makes it hard for the services to offer competitive compensation to people who enter service from professions, such as medicine or law, or to individuals who leave military service and return later in their careers.

Consequently, a number of groups have suggested the services replace their time-in-service pay tables with time-in-grade-pay tables. This was a key recommendation of the Defense Advisory Committee on Military Compensation, an earlier blue-ribbon panel that issued recommendations for overhauling the pay system in a 2006 report.

Nonetheless, the commission rejected that idea because promotion speed is subject to supply and demand of personnel in particular occupational areas, and would exacerbate pay differentials that currently exist between fast- and slow-promoting occupations.

Instead, the panel recommended the Pentagon adopt a program to give "constructive credit" to top performers who are promoted early; to professionals, such as doctors; and to those with prior service. For example, doctors might enter the force as full colonels, for pay purposes, where the skills they bring to the service would function as a credit against their lack of time in service. Personnel promoted early would be credited with the amount of time they were promoted early, thereby receiving an enduring pay advantage for their high performance. Likewise, those with prior service would re-enter service with a credit for time previously served.

The commission also believes the Pentagon should seek more money and flexibility for offering financial incentives to address shortfalls in particular occupations or to retain personnel with valuable skills. Currently, there are more than 60 categories of what's known as "special and incentive pays" with various restrictions on how they can be used.

To improve efficiency, flexibility and effectiveness, the commission recommended consolidating the incentive programs into eight broad categories, including:

• Enlisted force management pay
• Officer force management pay
• Nuclear officer force management pay
• Aviation officer force management pay
• Health professions force management pay
• Hazardous duty pay
• Assignment of special duty pay
• Skill incentive/proficiency pay

"Within each category, the services would have flexibility to allocate resources to those areas that would most effectively and efficiently meet staffing needs," the commission reported.

The commission plans to release a second study volume dealing with non-cash and deferred compensation later this year.

The Pentagon is reviewing the commission's findings, and already has sought congressional authorization to adopt some of the recommendations, including one for the consolidation of special and incentive pays.