How can military service retention policies internalize the informational asymmetry over individuals’ preferences over pay and non-pay remuneration?

For an all volunteer force, one of the key determinants of retention is military pay. Military pay is determined by a number of factors, including various market forces, relative scarcities of required personnel, earnings in similar civilian occupations, and special features of the military job. The military salary frequently consists of pay, allowances, and benefits-in-kind (Sandler & Hartley, 1995). The last one frequently includes housing, medical support, training, recreational activities, etc. Thus, the military employer should strive to make the net market value of military benefits equal to the net benefits of a similar civilian job (Sandler & Hartley, 1995). Since different recruits to the military will prefer different wages-benefits combinations, the military employer should attempt to select the cheapest compensation package satisfactory to each individual recruit. This may be very difficult, however, whenever it is costly or impossible to discriminate between individual preferences (Sandler & Hartley, 1995).

One economic model of military compensation suggests several complementary approaches for mitigating such difficulties. One, is to separate military occupations that have close civilian equivalents from those that don’t (Sandler & Hartley, 1995). Another, is to convert nonmonetary military compensation into monetary form, to make the comparisons easier. And the final approach, is to make sure that the military employees are paid according to their contribution, at levels comparable to their civilian counterparts (Sandler & Hartley, 1995).

References

Sandler, T., & Hartley, K. (1995). The Economics of Defense. Cambridge: Cambridge University Press.