An Econometric Analysis of the Effectiveness of Compensation to Retention

In July 2001, Lieutenant General Donald L. Peterson, Deputy Chief of Staff, Personnel, United States Air Force, testified before Congress that adverse retention rates were senior leadership’s number one concern. Military compensation sustains defense manpower policies that in turn support the nation\u27s defense strategy. Defense spending must be allocated efficiently to maintain the optimal mix of forces and weapon systems to respond to national security objectives. The President requested $149.9 billion for military pay and healthcare for Fiscal Year 2009, or 29 percent of the total proposed defense budget. When military compensation constitutes nearly one-third of department expenses, its impact on retention of personnel must meet targets. This thesis estimates the value of military compensation’s effect on the probability of retaining Air Force personnel in a cross-sectional analysis. The findings suggest that compensation packages are effective at retaining military members at critical points in their career to develop senior officer and enlisted leaders. Prior research estimated at the aggregate level, but we modeled our data for individual observations to estimate how members prefer to delay civilian earnings until after retirement eligibility. We found that our findings, while interesting, would improve if estimated through a binary probit model in time-series analysis