Introduction. Chapter 13. Michael Hansen Diana Lien

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1 Chapter 13 Compensation and Voluntary Participation in a Continuum of Service Michael Hansen Diana Lien Introduction Since the end of the cold war, and after September 11, 2001 in particular, the U.S. military has used reservists more frequently, for longer periods of time, and in more varied roles. There are few indications that this higher level of reserve involvement will decrease in the near future. Yet many of today s reservists signed on at a time when the typical reserve commitment was 38 days of service per year, not the considerably longer activation periods they often face today. 1 In addition, uncertainties surrounding the timing and length of mobilization, as well as the possibility of involuntary mobilizations, have the potential to reduce interest in reserve service. Consequently, the Department of Defense (DOD) is considering ways to increase opportunities for voluntary participation in the reserves and to provide reservists with more choice in determining their level of participation. One such proposal is the continuum of service, which seeks to blur the lines between active and reserve duty while making it relatively easy to move from one status to the other a significant departure from current methods of managing reservists. Because of this change, policy makers have questioned whether the existing compensation system provides enough incentive for reservists to continue volunteering at these increased levels. Research has shown that individuals do respond to monetary incentives that encourage participation. However, data do not yet exist in the context of the continuum of service. Consequently, to aid policy makers in developing effective incentives for this new service environment, it is necessary to collect additional data on the responsiveness of reservists to changes in compensation. This chapter summarizes the results of a 2005 survey of reservists and discusses potential changes in compensation policy that might encourage varying levels of reserve participation. 2 a Continuum of Service 223

2 The chapter begins with a brief discussion of the continuum of service. The subsequent two sections describe the survey s results, examining the levels at which reservists are willing to participate as their compensation changes, and briefly discussing the costs and benefits of different incentives. 3 The final section presents general conclusions. The Continuum of Service A New Model of Reservist Participation Men and women who wish to serve in the military must choose between full-time active and part-time reserve duty. Many members who have served in the active components choose to volunteer with reserve components after leaving active duty. Characterizing service members as either active or reserve has been the norm for decades, but it is not consistent with the way the services currently use personnel (Gotz 2004). Today, more and more reservists are consistently and significantly exceeding the traditional 38-day service requirement (Winkler et al. 2004). Large numbers of reservists have been shifted to active duty status, and a large percentage has been mobilized in support of the global war on terror. These reservists work alongside their active duty counterparts in the full range of military operations. Furthermore, it appears that DOD will maintain reservist participation at these historically high levels for the foreseeable future (Gotz 2004). Several researchers have noted the conscription flavor implied by using mobilization as a force management tool (Winkler et al. 2004). The theoretical consequences of involuntary mobilization in an all-volunteer force are well understood. Managing the force in this way is likely to have an adverse effect on reserve recruiting and retention. These problems are exacerbated when involuntary mobilization levels are substantively higher than what reservists expected when they chose to serve. There is little empirical evidence to suggest that recent increases in the frequency and duration of involuntary mobilizations have adversely affected reserve recruiting and retention (Winkler et al. 2004; Hansen, MacLeod, and Gregory 2004). However, policy makers have decided that it would be prudent to develop mechanisms to address these potential staffing problems before they arise. In broad terms, DOD can reduce the need for involuntary mobilization in two ways. The services can reduce how much they use reservists to better align participation levels with reservists expectations in effect, reducing the demand for reserve forces. Alternatively, the services can provide opportunities and incentives for reservists to voluntarily choose their level of participation, which should help to increase the supply of reservists available to meet higher demand levels. Given concerns about recruiting and retention, some policy makers have proposed replacing the existing model of reserve participation with a new one, the continuum of service. As noted, this construct would make it relatively easy to move from one status (active or reserve) to the other. In addition, the continuum would allow 224 Benefit Structure for the Future

3 different degrees of reserve participation, with increased variation from the traditional 38-day requirement, creating an expectation that is more consistent with how reservists are actually used today. To the extent that more people are willing to volunteer for higher levels of participation, the need for involuntary mobilization could be reduced, if not eliminated. At the heart of this continuum is the recognition that people differ in their willingness and ability to participate in reserve activations and deployments. 4 It recognizes that not all members of the reserves are identical; rather, they have different preferences, employment opportunities, and career objectives that affect their participation preferences. For example, students, the self-employed, part-time workers, and the unemployed all have different needs than a reservist working full time for a civilian employer. Compensation and the Continuum of Service Providing additional opportunities for volunteerism will likely create a willingness among reservists to participate at different levels. However, there is no guarantee that merely implementing a continuum of service will generate the participation levels necessary to meet service needs. Consequently, the services need a more flexible compensation system that offers monetary incentives to reservists who voluntarily select the higher levels of participation needed to meet operational demands. It is not clear how dramatic these changes in compensation will need to be. Furthermore, because each person has a unique preference for military service, as well as individual career and family constraints, DOD will need to offer varying financial incentives to promote different levels of participation. This diversity underscores the necessity of a more flexible compensation system. When structuring a flexible compensation system, economic theory provides two general principles for achieving an efficient result (Koopman et al. 2000). First, changes to the compensation system should originate as a direct response to a specific staffing problem. Second, pay targeted to a select group of members, such as those in a particular occupational field, is more efficient than an across-the-board compensation adjustment. In other words, while an across-the-board increase can alleviate a staffing problem in a specific area, it also raises compensation in areas where there is no problem thereby resulting in a far more expensive solution. Targeted pay, in contrast, should achieve the same result with substantially lower costs. Thus, across-the-board changes in compensation should only be used for widespread problems that affect many disparate skills, units, or groups of reservists. The Need for Additional Data While economic theory provides general principles for constructing a cost-effective compensation system, it cannot predict the exact magnitudes of compensation necessary to encourage sufficient levels of participation in the reserves. When considering potential compensation changes, organizations typically examine the effectiveness of a Continuum of Service 225

4 past adjustments to determine how much they need to increase wages or benefits now (see, for example, Hansen and Wenger 2005). While this approach is often useful, it cannot be used to develop incentives that would support a continuum of service. Two primary reasons prevent the use of historical data. First, there is little variation in current reserve compensation. For example, bonus levels rarely change, and all personnel eligible for a particular bonus typically receive the same amount. Consequently, with so little observable variation, it is difficult to estimate a precise relationship between changes in compensation and changes in reserve behavior (Garcia and Reese 1996). Second, even if precise behavioral estimates were available, the type table 1. continuum of Service Survey Variables Obligation of 38 duty days or fewer per year Activated fewer than 12 months every 6 years 0% of mobilization is spent outside the continental United States (OCONUS) $0 monthly affiliation bonus $0 bonus per month of mobilization Obligation of duty days per year Activated 12 months every 6 years Participation Level Activations Obligation of duty days per year Activated 24 months every 6 years OCONUS Deployments 30% of mobilization is spent OCONUS $200 monthly affiliation bonus $200 bonus per month of mobilization 0% match TSP match up to 3% of basic pay Status quo: retirement pay received at age 60 No additional retirement points Affiliation Bonus 60% of mobilization is spent OCONUS $500 monthly affiliation bonus Mobilization Bonus $500 bonus per month of mobilization Thrift Savings Plan (TSP) Match Retirement pay received at age 58 Retirement Age TSP match up to 5% of basic pay Retirement pay received at age 55 Annual Affiliation Retirement Points 15 retirement points annually 30 retirement points annually Obligation of more than 180 duty days per year Activated 36 months every 6 years 90% of mobilization is spent OCONUS $1,000 monthly affiliation bonus $1,000 bonus per month of mobilization TSP match up to 7% of basic pay Retirement pay received at mandatory separation 50 retirement points annually 226 Benefit Structure for the future

5 of change necessary for today s continuum of service may lie outside the scope of the existing compensation system; estimates based on historical data would be highly tenuous. In some instances, for example, the monetary incentives necessary to induce increased reserve participation could be significantly larger than the compensation levels authorized under current law. To offset these shortfalls, we developed and fielded a survey to gain insight into reservists preferences. This survey asked members of the selected reserve about their preferences for various participation and compensation options. Specifically, the survey presented different levels of participation, amounts of reserve pay, and benefit packages. To collect the most meaningful data, no one package was structured to be clearly better than another rather, each one s appeal depended on the preferences of the individual reservist. In essence, this aspect of the survey forced respondents to make trade-offs among these variables, similar to decisions they would have to make in the real world. Table 1 summarizes the type of alternatives respondents had to consider when evaluating their participation preferences. 5 Reservist Preferences in a Continuum of Service Preferences for Different Levels of Participation This section examines respondents preferences for different levels of participation in the reserves. These results show the choices reservists would make if they had different participation options, assuming everything else about the system remained the same including compensation. Thus, these responses reveal what participation levels policy makers could expect in a continuum of service with no change in the compensation system. Duty Days. The first characteristic we looked at was the number of duty days a reservist would be willing to voluntarily serve each year. Reservists said they would like to serve 38 days or fewer or 39 to 90 days in almost equal numbers (Figure 1); combined, these reservists represented 51 percent of respondents. However, more than one-fifth of all respondents showed interest in a higher level of participation: 14 percent said they would opt to serve between 91 and 180 duty days annually, while another 9 percent indicated they would choose to serve more than 180 days per year. The remaining 26 percent of respondents stated that they plan to leave the reserves, and would do so even if they could choose various levels of participation. We also estimated a simulation (not shown) where respondents were forced to choose one of the participation options. While the percentage of respondents choosing each different level rose, there was a disproportionate increase in the share choosing lower levels of participation. For example, the percentage choosing over 180 days rose slightly, from 9 to 11 percent; in contrast, the proportion choosing 38 days or less rose from 25 to 40 percent. These results are not surprising; respondents who would choose to leave prefer relatively few days of obligation if they are forced to choose one of the participation options. a Continuum of ServiCe 227

6 Figure 1. Reservist Participation Preferences Figure 2. Reservist Preferences for Length of Activation Length and Frequency of Activation. The second participation characteristic we looked at was length and frequency of activation; that is, the number of months a reservist would be willing to serve on active duty over a six-year period. Respondents clearly prefer lower activation levels (Figure 2). The percentage of respondents choosing each option declined as the length of the activation increased; 28 percent preferred less than 12 months of activation every six years, while only 9 percent would choose 36 months of duty. But while more than half preferred activation periods 228 Benefit Structure for the Future

7 at or below 12 months within a six-year period, 21 percent said they would choose lengthier activations, even without any changes in compensation. Portion of Mobilization Spent Outside the Continental United States. Preferences for time spent outside the continental United States (OCONUS) during mobilization (Figure 3) were similar to those for activation in general. As the amount of time spent overseas increases, the proportion of reservists who prefer this level of participation declines. However, the difference between the most preferred (no time spent OCO- NUS) and least preferred (90 percent of mobilization spent OCONUS) options was relatively small. For example, only 22 percent of reservists prefer not to be sent outside the United States. At the other extreme, 17 percent prefer spending 90 percent of their mobilization overseas. It is striking that a significant share of personnel prefers overseas mobilizations, even without any changes in compensation. Figure 3. Reservist Preferences Regarding Portion of Mobilization Spent OCONUS Impact of Compensation on Reserve Participation Preferences As the previous discussion shows, providing more flexibility will encourage some reservists to increase their participation levels. Changes in compensation both cash compensation as well as changes in retirement incentives also impact preferences. The data collected about these preferences should be useful as policy makers contemplate the changes needed to achieve a desired level of voluntary reservist participation. Financial Compensation. To assess how compensation changes would affect participation levels, the survey asked respondents to identify the number of annual duty days they would voluntarily serve under four incentive scenarios. The sole difference among the four scenarios was the monthly affiliation bonus available for a commitment a Continuum of Service 229

8 of 91 to 180 duty days per year; all other characteristics were the same. 6 The amounts of the affiliation bonus in the four scenarios were $0, $200, $500, and $1,000 per month. Not surprisingly, higher affiliation bonuses increased reservists willingness to commit to the targeted participation level in this case 91 to 180 duty days (Figure 4). 7 For example, in the absence of any affiliation bonus, 14 percent of reservists preferred 91 to 180 duty days per year. With a $200 monthly bonus, however, 24 percent of participants said they would commit to this level. That percentage increased to 29 percent with a $500 monthly bonus, and 34 percent with a $1,000 monthly bonus. Figure 4. Reservist Participation Preferences, With Monthly Affiliation Bonuses for 91 to 180 Duty Days Interestingly, bigger bonuses did not change preferences among reservists planning to leave the reserves. With no affiliation bonus, 26 percent of respondents indicated they would leave the reserves. But even with a $1,000 monthly bonus, less than 3 percent of these reservists said they would stay. In contrast, bonuses had a considerable impact on respondents already intending to stay. When a $1,000 bonus was offered, the percentage of reservists preferring 39 to 90 duty days dropped from 26 percent to 17 percent, while the percentage opting for 91 to 180 duty days rose from 14 percent to 34 percent. This finding is notable for two reasons. First, it is unlikely that financial incentives targeting specific participation levels would positively impact overall retention. Second, while targeted bonuses can increase voluntary participation in certain areas, policy makers should be aware that they would likely draw reservists away from other participation options. For example, while policy makers may want to increase the number of reservists committed to 91 to 180 days per year, they may not want to do so at the expense of the number willing to serve over 180 days annually. 230 Benefit Structure for the Future

9 In principle, then, policy makers can use targeted bonuses to encourage different levels of participation among reservists. If tailored correctly, these bonuses will increase participation in the targeted areas. But they will also decrease the share of reservists volunteering for other levels of participation. They are not likely to increase the total pool of participants an important point in using this type of force management tool. Consider a scenario where different affiliation bonuses are tied to different levels of participation. In this scenario, reservists who commit to 38 or fewer days per year are not offered any additional compensation. Those who commit to 39 to 90 days receive a $200 monthly affiliation bonus, those who serve 91 to 180 days receive $500 per month, and those who commit to more than 180 days receive $1, This menu of affiliation bonuses would enable policy makers to significantly increase the percentage of reservists willing to commit to more than 90 duty days per year (Figure 5). Furthermore, the increase is mostly achieved by encouraging greater levels of participation among reservists who had previously been willing to commit to only 38 days or less per year. In contrast, the share of reservists willing to serve for 39 to 90 days annually is virtually unchanged by the introduction of the affiliation bonuses. Figure 5. Reserve Participation Preferences, With and Without Monthly Affiliation Bonuses Financial compensation, in the form of monthly mobilization bonuses, has a similar effect on respondents willingness to accept activations and time spent overseas. Two examples are illustrated here. The first looks at reservists willing to accept 24 months of activation within a six-year time frame, and how various monthly mobilization bonuses affect their activation preferences (Figure 6). The second measures how reservists who are willing to spend 90 percent of their mobilizations outside the a Continuum of Service 231

10 United States respond to a range of mobilization bonuses (Figure 7). In both cases, the mobilization bonus increased reservists willingness to volunteer for the targeted level of commitment. As with other incentive options, however, when participation increased in targeted areas it also decreased at other levels. Figure 6. Reserve Participation Preferences for Length of Activation, With Monthly Mobilization Bonus for 24-Month Activations Figure 7. Reservist Participation Preferences Regarding Portion of Mobilization Spent OCONUS, With Monthly Mobilization Bonus When 90 Percent of Mobilization Spent OCONUS 232 Benefit Structure for the Future

11 Retirement Incentives. Reservists responsiveness to retirement incentives is qualitatively similar to their response to monthly affiliation and mobilization bonuses retirement incentives increase the willingness to volunteer at targeted service levels. Two examples support this conclusion. The first shows how respondents willingness to serve 91 to 180 days changes when offered various Thrift Savings Plan (TSP) contributions (Figure 8). The second shows how these preferences change as additional retirement points are offered (Figure 9). In both cases, the presence of retirement incentives increases reservists willingness to volunteer for the number of duty days targeted by the incentive. Figure 8. Reservist Participation Preferences, With TSP Matching Contributions for Reservists Committed to 91 to 180 Duty Days Notably, retirement benefits have the same impact on reserve participation preferences regardless of where they are targeted whether it is number of duty days per year, length of activations, or extent to which mobilizations are spent overseas. Further, as with the examples presented earlier, the increase comes through decreased volunteerism at other levels, not through increased retention. Again, targeted incentives do not substantially change the intentions of reservists planning to leave the reserves. Thus far, we have examined incentives that reward reservists willing to commit to desired participation levels. Considering how across-the-board compensation changes would influence reservist participation preferences is also useful. Changing the retirement age for all reservists, for example, would be an across-the-board policy change that could impact preferences regarding duty days per year. In the case examined here, the retirement age was lowered from 60 to 58 and 55. Survey results indicate that the impact of such across-the-board changes in retirement benefits on reservist preferences would be negligible (Figure 10). Participation preferences a Continuum of Service 233

12 remained virtually unchanged as the retirement age was lowered. However, reducing the retirement age to 55 decreased the percentage of respondents who said they would leave the reserves by about 1 percentage point. 9 Figure 9. Reservist Participation Preferences, With Additional Retirement Points for Reservists Committed to 91 to 180 Duty Days Figure 10. Reservist Participation Preferences, With Acrossthe-Board Changes in Retirement Age 234 Benefit Structure for the Future

13 These findings should not come as a surprise. Across-the-board changes in the retirement age do not support voluntary participation in a continuum of service because they provide no incentives to volunteer at different levels; everyone gets the incentive regardless of what they commit to. With no incentive to alter their participation level, there is no reason for reservists to change their service commitment. Analysis of Potential Changes to Compensation The data presented in the previous section consistently show that targeted incentives have the potential to shift participation preferences and, therefore, could support voluntary participation in a continuum of service. Specifically, survey respondents demonstrated a willingness to accept different levels of duty days, activation, and mobilization if offered additional compensation. These results hold true for increases in monetary compensation, such as monthly affiliation or mobilization bonuses, as well as for enhancements in retirement incentives, such as matching contributions to the TSP or additional retirement points. Despite these qualitative similarities, the survey results show that some incentive options have a greater effect on reservist preferences than do others. Moreover, each compensation change has a different cost associated with it. Thus, while the data suggest that desired levels of voluntary participation can be achieved in multiple ways, some options will be more cost effective than others. By comparing the pay and retirement expenditures needed to implement these incentives ( the costs ) to reservists reaction to them ( the benefits ), it is possible to assess the relative costs of various changes to the compensation system. Using the survey results, it is possible to estimate how investing the same dollar amount in different incentive options affects reservist participation preferences, and thus extrapolate the cost-effectiveness of various incentives. 10 Two levels of participation for enlisted personnel were examined: 91 to 180 days per year and 24 months of activation every six years (Table 2). 11 In these cases, bonuses and retirement points would be offered only to members who volunteer for targeted participation levels. The change in retirement age, in contrast, would be offered to all reservists, regardless of their service commitment. The results show that targeted incentives are substantially more cost effective than across-the-board incentives. An across-the-board drop in the retirement age increases costs, but has virtually no effect on reservists willingness to volunteer at the desired levels. On the other hand, each of the targeted incentives results in a relatively large increase in targeted participation. For example, increasing compensation expenditures by 1 percent raises the percentage of enlisted personnel who would volunteer for 24 month activations by anywhere from 8 percent with an affiliation bonus, to 45 percent with an increase in retirement points. The targeted incentives have a similar impact on reservists willingness to serve 91 to 180 duty days per year. 12 a Continuum of Service 235

14 Table 2. Responsiveness of Enlisted Personnel to Changes in Compensation 1 Percent Increase in Compensation Expenditures From: Percentage Change in Share Selecting These Participation Levels 24 Months Activated Every 6 Years Duty Days Per Year Affiliation bonus 8% 7 10% Mobilization bonus 21% 36 51% Retirement points 45% 38 51% Retirement age 0.1% % Clearly, these incentives would increase the number of reservists willing to commit to the desired participation level. However, some reservists are willing to increase their participation without any change in compensation. If incentives are offered to all reservists who are willing to volunteer for a given level of participation, those who would have volunteered anyway receive the additional compensation, without any change in behavior. While some amount of these unnecessary payments is unavoidable, it reinforces the cost-effectiveness of carefully targeted compensation tools. Mobilization bonuses would be more cost effective than affiliation bonuses (Table 2). This is partly due to the way mobilization bonuses would be paid out. Specifically, mobilization bonuses would only be paid to reservists while they are mobilized. Affiliation bonuses, in contrast, would be paid to all reservists who commit to desired participation levels, regardless of whether they are actually mobilized. On the benefit side of the equation, we believe that reservists prefer mobilization over affiliation bonuses because they are perceived as less risky. If service members expect to earn less while mobilized, they may believe receiving a monthly mobilization bonus will provide more financial stability than receiving a monthly bonus throughout their service commitment. Among all of the targeted incentive options, the results shown here suggest that increasing retirement points may be the most cost-effective way to influence reservists participation preferences. This is an unexpected finding, as both economic theory and a large body of empirical literature consistently demonstrate that individuals prefer immediate compensation over deferred compensation (Kleinman and Hansen 2005). It is possible that survey respondents overestimated the value of increased retirement points, given the complex calculations necessary to estimate future changes in retirement compensation. Given the bulk of evidence disputing the cost-effectiveness of deferred compensation, we caution against relying too heavily on these survey findings. If policy makers are considering enhancements to the reserve retirement package, survey participants 236 Benefit Structure for the Future

15 clearly responded favorably to matching TSP contributions and additional retirement points. But in terms of the continuum of service, both of these policy alternatives need further evaluation. Conclusions A central principle of a continuum of service is the recognition that reservists differ in their willingness and ability to accept activation and deployment. Furthermore, experience with the all-volunteer force has demonstrated that service members respond to incentives. This suggests that targeted incentives will encourage reservists to voluntarily choose participation levels that meet operational demand for their skills. Analysis of the survey data presented here generally confirms these principles. The data suggest that reservists have different preferences for participation, even without changes in compensation. While many reservists prefer the traditional 38 duty days per year, a sizeable percentage would be willing to participate more frequently if given the flexibility to do so. Similarly, there is significant variation in preferences regarding the length of activations and the extent to which mobilizations are spent overseas. An important implication of this finding is that policy makers can increase voluntary participation in the reserves simply by implementing a continuum of service, even without changing compensation. These conclusions, however, should not suggest that changes to compensation are unnecessary. There is no guarantee that, absent additional compensation, participation preferences among reservists will align with the services demand for their skills. However, the survey data consistently show that reservists are willing to adjust their preferences in response to changes in compensation. Thus, policy makers can use compensation tools to effectively implement a continuum of service where reservists voluntarily participate at levels sufficient for staffing needs. In designing financial incentives, the analysis demonstrates that reservists are more likely to opt for specific levels of participation, such as 91 to 180 duty days per year, if incentives are restricted to individuals who choose those levels. This finding holds true for both financial incentives, such as affiliation and mobilization bonuses, as well as for retirement incentives, such as matching contributions to the TSP and increases in annual retirement points. The cost-benefit analysis suggests that among targeted incentives, mobilization bonuses are the most effective way for the services to encourage higher levels of reserve participation. Across-the-board changes to compensation, in contrast, do not encourage the voluntary participation that underpins a continuum of service. While some acrossthe-board changes to compensation, such as lowering the retirement age, might be very popular, they provide no direct incentive to volunteer at specific participation levels. If a compensation enhancement is provided to all members regardless of a Continuum of Service 237

16 commitment, there is no reason for reservists to change their participation preferences. That said, if policy makers intend to enhance the reserve retirement package, matching TSP contributions and the provision of additional retirement points are two targeted changes to which survey participants responded favorably; they could be examined as options to help increase participation. While a continuum of service and the associated financial incentives could result in significant changes in reserve participation, the survey data suggest that such initiatives would not significantly increase retention. Changes to compensation appear to have a larger effect on reservists who have decided to remain in the reserves than on individuals who are considering separation. This result implies that using targeted compensation incentives to increase one level of reserve participation will decrease the number of reservists participating at other levels. Consequently, policy makers need to carefully target compensation increases to encourage members to volunteer at levels that meet the military s demand for their skills. But while there is no evidence that targeted incentive policies would increase retention, it is important to note that the continuum of service offers an alternative to recruiting and retention as a way to increase reserve staff. Higher levels of participation by existing reservists have the same qualitative impact on staffing needs as increasing the total number of reservists. For example, encouraging a reservist to double or triple the number of duty days he or she is willing to serve per year means the services have to recruit one less new enlistee to meet force needs. Thus, the continuum of service will enhance the services ability to meet force staffing requirements and reduce the need to involuntarily mobilize members of the reserve components. With utilization of the reserve components at historically high levels, such innovative initiatives will be key to successful force management in the future. Appendix. Choice-Based Conjoint Surveys When historical data are not available, researchers often rely on choice-based conjoint (CBC) surveys, which ask respondents to reveal preferences among two (or more) options that differ in multiple ways. 13 This strategy attempts to replicate realworld decision making, where choices are rarely made holding all else constant. By observing the decision-making patterns of respondents in such a framework, researchers gain insight into how people make trade-offs. CBC surveys present respondents with multiple bundles of characteristics that they are asked to consider. In the continuum of service survey, these bundles are reserve pay, work, and benefits packages. Attributes within a bundle are set at different levels, so that each package differs from others in at least one dimension. Typically, there is no package that is universally better than the others. For example, some attributes are more favorable in bundle 1, while other attributes 238 Benefit Structure for the Future

17 are more favorable in bundle 2, etc. In this way, respondents are forced to reveal those attributes (and levels) for which they have the strongest preference. Many CBC surveys allow respondents to specify that they don t like any of the bundles. In the continuum of service survey, for example, reservists can indicate that I plan to leave the reserves and none of these options would convince me to stay. When analyzing survey data, however, it is important to recognize that respondents are merely stating their preferences; there is no guarantee that actual behavior will mimic those preferences. While these responses can help predict behavioral change, they are more tenuous than estimates based on actual historical behavior. Therefore, CBC survey data can only supplement, but not replace, behavioral data. Survey Design The continuum of service survey instrument was designed to poll current members of the selected reserve, a population that is relatively easy to locate and that understands the current working environment in the reserves. 14 It is important to note, however, that this is just one of many different populations that could be affected by implementation of a continuum of service. Not included in the survey, for instance, are potential recruits, who may be more likely to join the reserves if participation requirements were more flexible or if compensation were increased. Respondents were asked to consider eight characteristics of reserve service that fell into three broad categories: extent of participation, financial compensation, and retirement incentives. The first category addresses potential changes in reservist participation that one might observe in a continuum of service at current compensation levels. The second and third categories include potential changes to compensation that focus groups suggested would encourage voluntary participation in a continuum of service. The survey did not query reservists about potential changes in educational and health care benefits, as those benefits were modified by the fiscal year 2005 National Defense Authorization Act. Extent of Participation. The survey focuses on three separate aspects of reservist participation. The first is a person s level of participation the number of duty days a reservist would be willing to voluntarily serve per year. In considering this question, respondents were asked to contemplate participation levels that exceed the 38-day requirement traditionally associated with reserve service. 15 The remaining participation questions focus on the duration of activations and deployments, as well as the extent to which mobilizations are spent outside the continental United States. Currently, a reservist can expect to be activated for approximately 12 months within a six-year period. Respondents were asked to assess scenarios in which they were activated both more and less frequently than this. Respondents also were asked to consider varying the percentage of their mobilizations spent OCONUS. a Continuum of Service 239

18 Financial Compensation. To measure the potential effect of changes in financial compensation in a continuum of service, respondents were presented with two types of bonuses set at varying amounts. The bonuses would only be available to those reservists willing to commit to specified participation levels. The first, an affiliation bonus, was described as a cash bonus that would be paid each month a person was affiliated with the reserves, regardless of the extent to which he or she actually participates. The second, a mobilization bonus, was described as cash compensation to be paid every month that the reservist is mobilized. In principle, a mobilization bonus could be used in conjunction with an affiliation bonus to provide policy makers with more flexibility in compensating reservists. Both types of bonuses were portrayed as increases to current compensation levels and subject to all applicable local, state, and federal taxes. Neither type of bonus is currently available to reservists. 16 Retirement Incentives. Finally, respondents were asked about three potential changes in retirement benefits. The first change involved the services matching contributions to the Thrift Savings Plan. Although the services currently have the authority to designate critical specialties as eligible for such matching contributions, they have not done so to date. Respondents were presented with varying percentages of basic pay (including the status quo) that, when placed in the TSP, would generate a matching contribution from the service. For example, if the services match up to 5 percent of reservists TSP contributions, a reservist contributing up to 5 percent of basic pay to his or her TSP account would receive an equal contribution from the service. The second and third retirement incentives presented to respondents involved more substantive changes to the retirement system. Specifically, respondents were presented with scenarios that reduced from 60 the age at which reservists are eligible to receive retirement benefits, and increased annual affiliation retirement points, which are used to calculate retirement benefits. While the other financial incentives presented in the survey were tied to specific levels of participation, respondents were advised that they would receive the additional retirement points regardless of their participation commitment, making it an across-the-board incentive. Sample Survey Question. The survey contained 19 CBC questions. 17 Table A-1 replicates an actual CBC question used in the survey. 18 Each column contains eight different characteristics of reserve service that make up a package of pay, benefits, and participation levels. Respondents can compare the levels of each attribute in the different packages by looking at each row individually. For example, package 1 offers a $500 monthly affiliation bonus, package 2 offers a $1,000 monthly affiliation bonus, and package 3 offers a $200 monthly affiliation bonus. 240 Benefit Structure for the Future

19 Table A-1. Continuum of Service Survey Sample Question Which of the following reserve pay, work, and benefits packages is best for you? Assume the packages are identical in all ways not shown. From these four packages, choose the package you prefer the most. Package 1 Package 2 Package 3 Package 4 Obligation of 39 to 90 duty days per year Activated 24 months every 6 years 90% of mobilization is spent OCONUS $500 monthly affiliation bonus $1,000 bonus per month of mobilization TSP match of up to 5% of basic pay Retirement pay received at mandatory separation Automatically receive 50 retirement points annually Obligation of over 180 duty days per year Activated 12 months every 6 years 60% of mobilization is spent OCONUS $1,000 monthly affiliation bonus $200 bonus per month of mobilization TSP match of up to 3% of basic pay Retirement pay received at age 60, no change Automatically receive 30 retirement points annually Obligation of 91 to 180 duty days per year Activated less than 12 months every 6 years 30% of mobilization is spent OCONUS $200 monthly affiliation bonus $500 bonus per month of mobilization TSP match of up to 7% of basic pay Retirement pay received at age 58 Automatically receive 15 retirement points annually I plan to leave the reserves and none of these options would convince me to stay In this example, however, the affiliation bonus level is not the only difference among the three packages. Furthermore, the package with the most generous affiliation bonus (package 2) is less generous in other ways (e.g., mobilization bonus). In other words, no package strictly dominates another, such that each of its elements is more desirable than the elements in another package. It is this feature that forces respondents to make trade-offs and reveal their preferences for different aspects of compensation and participation. If a respondent prefers package 1, for example, we can presume that he or she prefers the combination of compensation and participation options in package 1 to the combinations listed in packages 2 and 3. Because respondents answer multiple CBC questions about a variety of packages, researchers can use the survey responses to quantify how each attribute level affects the likelihood that a package will be preferred. This technique allows one to estimate the marginal impact (i.e., the impact holding all else constant) of a change in a single attribute. a Continuum of Service 241

20 Survey Fielding, Timeline, and Response Rates In fielding the survey instrument to reservists, the goal was to obtain a sufficient number of respondents from each of the guard and reserve components enlisted and officer populations. 19 Because contact information for reservists is notoriously poor, drawing a sample from the entire reserve population would result in extremely low response rates. Consequently, the sample was restricted to members of the selected reserve with current addresses (i.e., those reservists who had been recently contacted or whose contact information had been recently updated). Note, however, that reservists with current addresses are probably not a representative sample of the entire reserve force population, and are probably more likely to have been recently mobilized or to have had a change in dependency status. From this subset of the selected reserve, a stratified random sampling strategy was used to generate an address list of 26,814 reservists. This sampling technique oversamples subgroups with small populations to generate a sufficient number of respondents from those subgroups, and is therefore not representative of the entire selected reserve population. 20 Differing response rates among these subgroups further skew the sample. To account for these differences, results reported here have been weighted to more accurately reflect the population currently serving in the selected reserve. 21 On July 9, 2005, we sent each reservist on the address list a packet of information that included a formal invitation to participate in the survey from the Assistant Secretary of Defense for Reserve Affairs; instructions on how to access the survey on the Internet or request a paper copy; and a list of the eight characteristics of reserve service and their definitions. A reminder postcard and went to each reservist on July 30, 2005 and August 16, 2005, respectively. Of the 26,814 packets sent by mail, 1,813 were undeliverable. But because over 15,000 of the reservists on the address list were also contacted via , it is likely that some of the reservists who did not receive the original packet of information were ultimately contacted. The precise number of these contacts, however, is unknown. Table A-2 provides data on unweighted response rates. For each component, the table details the total number of reservists, the number of reservists surveyed, and the number of actual respondents. The final column lists the effective response rate, which is adjusted to account for the undeliverable packets. The overall survey response rate was just under 12 percent. 22 There is, however, significant variation in response rates by component. For example, the Navy response rate was 17.6 percent, while the Marine Corps response rate was just under 6 percent. Within each component, response rates also varied with pay grade. Response rates were lowest for E-1s to E-4s and highest for commissioned officers; rates for E-5s to E-9s fell in between. This variation in response rates underscores the importance of presenting weighted results. 242 Benefit Structure for the Future

21 Table A-2. Total Number of Reservists in the Reserve Components, Address List, and Sample Component Reserve Force a Address List b Sample Response Rate c Army Reserve 193,627 5, % Army National Guard 331,017 5, Air Force Reserve 75,305 4, Air National Guard 105,852 4, Navy Reserve 77,396 2, Marine Corps Reserve 39,964 3, Coast Guard Reserve 7,997 1, Total 831,158 26,814 2, % a. As of April b. Provided by the Defense Manpower Data Center in April c. We assume that returned information packets are randomly distributed across each of the components. Response rates are calculated by dividing the actual number of survey responses by this imputed number of packets. Notes 1. Prior to today s higher operational tempo for members of the reserve components, typical service in the reserves consisted of one weekend of service per month and two weeks of reserve duty per year, typically in the summer. Long mobilizations, such as those experienced in recent years, were relatively uncommon This chapter is based on a more detailed research memorandum by the CNA that summarizes the findings from the continuum of service survey. See Lien et al Details of how the survey was structured and administered are contained in the appendix to this chapter. Winkler et al provides an excellent description of the continuum of service concept. 5. The appendix describes each of the variables in more detail, including sample questions. 6. We chose to link the affiliation bonus to this level of service since it is a likely focus area of policy makers. The qualitative conclusions of this section, however, apply to all levels of participation. 7. The first stovepipe in each group represents the share of respondents who prefer a given level of participation when no bonus is offered; these percentages are identical to the data presented in Figure 1. Similarly, the last stovepipe in each group represents the share of respondents who prefer a given level of participation when a $1,000 monthly bonus is provided to those who agree to serve 91 to 180 duty days per year. a Continuum of Service 243

22 8. For simplicity, this example uses affiliation bonus levels that correspond to the levels presented in the survey. In practice, however, the survey-based estimates can be used to predict the effect on participation of any size bonus. 9. This latter result is similar to the conclusions reached by Asch et al To estimate the different costs of increasing participation, we first calculated the present discounted value of basic pay and retirement expenditures for the entire reserve force (See Lien et al for assumptions associated with these estimates). We then set each of the compensation and retirement incentives at a level that would increase current compensation expenditures by 1 percent making the cost of each incentive option the same. Calculations were performed for each incentive in the survey except Thrift Savings Plan matching contributions. Without reliable data on how many reservists currently participate in the Thrift Savings Plan, how much they currently contribute, or how these amounts would change if their contributions were matched, it was not possible to calculate the costs associated with this retirement incentive. 11. Similar results were obtained for commissioned officers and for different levels of desired participation. 12. The results for this level of participation are presented as a range since the costs associated with lower participation are very different than the costs associated with higher participation. Thus, costs for both the upper and lower ends of the range are used in this assessment. 13. See Kraus, Lien, and Orne 2003 for an in-depth discussion of the different assumptions implicit in using revealed and stated preference data. 14. The authors worked closely with the Deputy Assistant Secretary of Defense for Reserve Affairs for Manpower and Personnel and his staff on the design of the Continuum of Service Survey. 15. While the concept of the on-call reservist is an important feature of the continuum of service, we did not focus on reservist participation without an explicit requirement of duty days per year, since the on-call option would likely be more applicable to members of the individual ready reserve. 16. The services currently offer an affiliation bonus, but it is much more limited in scope than one that would support voluntary participation in a continuum of service. 17. In addition, respondents were asked 27 traditional survey questions regarding demographic characteristics, mobilization experience, and reenlistment intentions. 18. These packages are randomly selected for each question, so that no two respondents are presented with identical surveys. 19. The Defense Manpower Data Center (DMDC) provided us with the sample of reservists invited to participate in the survey, contact information for these reservists, and advice on constructing sample weights. 244 Benefit Structure for the Future