Toward Incentives for Military Transformation

A Review of Economic Models of Compensation

by Bogdan Savych


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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.

Table of Contents

  • Chapter One


  • Chapter Two

    Promotion Tournaments

  • Chapter Three

    Career Incentive Schemes: Deferred Compensation and Retirement Pay

  • Chapter Four

    Explicit Pay-for-Performance Incentive Mechanisms

  • Chapter Five

    Rewarding Teamwork and Cooperation in the Hierarchical Organization

  • Chapter Six

    Incorporating the Effects of Nonmonetary Factors

  • Chapter Seven

    Concluding Remarks

The research described in this report was sponsored by the Office of the Secretary of Defense (OSD). The research was conducted in the RAND National Defense Research Institute, a federally funded research and development center supported by the OSD, the Joint Staff, the unified commands, and the defense agencies.

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