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With generous government benefits for soldiers and none for PSCs, the take-home pay differential is not what people think.

Just How Overpaid are Private Security Contractors?

By Ann Jocelyn

A base pay of $165,000 per year is a lot of money for most people, especially to a soldier. It’s no wonder that some military professionals aspire to become highly paid private security contractors (PSCs), and that others will simply resent them for earning these high wages.

Compared with the basic pay of an active duty E-6 staff sergeant with 10 years of service, the cash compensation of a top-end PSC is a small fortune. Some critics are outraged that a high-end contractor is paid nearly five times as much as that of an E-6. The contracting system, they say, is unfair to the troops and is a rip-off of the taxpayer. For every one contractor, the reasoning goes, the U.S. could pay for five staff sergeants.

That might make sense if the compensation systems were similar. But they aren’t. Serviam spoke with some of the highest-paid PSCs in Iraq to learn exactly what they earn in salary and benefits, and what they return to the government in taxes. We then looked at official U.S. military compensation charts. When comparing net cash and noncash compensation, we found that the E-6 sergeant can take home more pay and benefits than the security contractor.

As the table below shows, the active duty E-6 has an annual base pay of $33,976 plus basic allowances for housing and subsistence, for a total of $44,863. Adding special duty pay, a reenlistment bonus aggregated over four years, and other allowances, minus federal taxes, the total net cash compensation comes to $63,340.

The independent security contractor, who in this instance earns a base pay of $165,000, receives no other benefits. Because he is rotated in and out of Iraq every 90 days, he cannot claim the income tax exemptions that he could if he was stationed abroad for a full tax year. In his high tax bracket, he must pay $69,300 in federal taxes—more than 50 times what the sergeant must pay.

That still leaves the contractor with a net cash compensation of $95,700, or about 38 percent more than the sergeant.

Then we factor in noncash benefits such as health care, installation-based benefits, subsistence in kind, family housing and barracks, education, and other benefits. For the sergeant, these benefits can total $22,765. The sergeant is also entitled to retirement pay accrual, Veterans Administration (VA) compensation and pension, VA health care, and related health benefits, amounting to $34,269 per year in deferred benefits. Total compensation for the staff sergeant after taxes can equal $126,734.

The contractor in this illustration receives none of the noncash benefits or deferred benefits of the sergeant. Now the tables are turned: $126,734 in total compensation for the staff sergeant, and $95,700 for the contractor.

But wait—there’s more. If the contractor wants the noncash and deferred benefits such as health care, housing, and retirement contributions, he must pay out of his pocket. His $95,700 take-home pay, minus the equivalent $22,765 in noncash benefits and the $34,629 in deferred benefits, leaves him with a net cash compensation equivalent of a paltry $38,306.

By contrast, the staff sergeant walks away with a net cash contribution of $69,340.

One can slice and dice the compensation figures in endless ways. The point is simply that the contractor’s U.S. government–approved pay, while higher than the sergeant’s pay in terms of cash received, is more economical for the taxpayer when taxes and benefits are counted.

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From the November/December 2007 issue of Serviam.