MENU OF CONTRACTS: A NEW APPROACH TO IMPROVING NAVY RETENTION BONUSES
MENU OF CONTRACTS: A NEW APPROACH TO IMPROVING NAVY RETENTION BONUSES

Summary/Abstract: Military success requires retaining sufficient capable service members, but there is little research on retaining quality personnel. We propose an innovative bonus structure to retain the right quantity and quality of personnel by setting retention bonuses through a menu-of-contracts. The menu provides choices between bonus structures that encourage higher and lower quality personnel to voluntarily select the bonus structure that best reflects their perceived quality. This addresses two essential problems in military personnel research: adverse selection (making inappropriate retention decisions due to hidden quality information) and moral hazard (incentives encouraging personnel to provide less than their best effort). A menu-of-contracts can meet the military’s retention needs without relying on past performance to measure expected future performance. This retains higher quality personnel, increases morale and improves future retention. It also induces personnel to maximize effort throughout their careers as they strive for the highest bonus while maintaining the perception of egalitarianism.

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