Toward Incentives for Military Transformation: A Review of Economic Models of Compensation (2005)

Examines four major models of compensation and how they apply to the military's system of incentives and its goals of transformation. Recent efforts toward military transformation have extensive implications for the military's personnel management and compensation systems. In addition to the existing goals of ensuring effective participation of individuals in the military (attracting, retaining, and developing qualified personnel), the compensation and personnel systems of a transformed military should emphasize effort and performance incentives by encouraging reasonable risk-taking and innovation, allow for greater speed and flexibility in deployment, and support more decentralized forces. The worry, however, is that current military systems cannot facilitate simultaneously all the needs of a transformed military. This report reviews economic models of compensation in a hierarchical organization and identifies factors within the military compensation system that might constrain or facilitate transformation efforts. In particular, it focuses on how lessons from these economic compensation models can be used to increase flexibility of personnel management and provide incentives for creative thinking and performance and well-calculated risk-taking. Frameworks reviewed in this report are useful in describing the behavior of military personnel and patterns of performance in the military. This report is part of a larger project titled "Enhancing the Flexibility of the Military Compensation System." The project seeks to define ways of simplifying and adding flexibility to the military compensation system that bring value to the military organization and support the goals of military transformation. Further effort within the project would use existing military compensation models to determine what changes to the compensation system would support transformation Two of the military's transformation goals have particular significance when considering its compensation system: (1) assuring that the system provides flexibility in managing personnel, and (2) assuring that the system induces innovatory activities and well-calculated risk-taking. In addition, the system needs to provide incentives for performance, retention, and skill acquisition. This report reviews four models of compensation: (a) promotion tournaments, in which a fixed number of people compete for a fixed number of rewards, (b) deferred compensation, (c) pay-for-performance mechanisms, and (d) nonmonetary rewards. It analyzes how each of these works in a hierarchical organization and identifies factors within the military compensation system that might affect its transformation efforts The military must ensure that its compensation system provides flexibility in managing personnel, induces innovatory activities and well-calculated risk-taking, and provides incentives for performance, retention, and skill acquisition. This report analyzes four models of compensation-promotion tournaments, deferred compensation, pay-for-performance mechanisms, and nonmonetary rewards-in the context of military transformation efforts Preliminaries......Page 0 CONTENTS......Page 5 1. Introduction......Page 15 2. Promotion Tournaments......Page 19 3. Career Incentive Schemes......Page 36 4. Explicit Pay-for-Performance Incentive Mechanisms......Page 49 5. Rewarding Teamwork and Cooperation in the Hierarchical......Page 61 6. Incorporating the Effects of Nonmonetary Factors......Page 69 7. Concluding Remarks......Page 78 Bibliography......Page 85 Evaluating the relationship between the goals of military transformation and the military compensation and personnel management systems is an important and timely topic.