Improving the efficiency of aviation retention bonuses through the use of market mechanisms

Abstract

Aviation Career Continuation Pay (ACCP), the retention bonus for Naval Aviators, has historically failed to meet stated retention goals. For fiscal year 2013 Naval Personnel Command reported that ACCP exceeded retention goals in some communities by more than 60%, while simultaneously falling over 60% short of retention objectives in others. We analyze the potential for using auction mechanisms to improve upon these results by controlling cost, quantity, and quality of aviators retained. Using survey data to estimate aviators’ quality and willingness to stay in active duty naval aviation, we compare the results of ACCP against three mechanisms, 1) uniform-price auction, 2) Quality Adjusted Discount (QUAD) auction, and 3) Combinatorial Retention Auction Mechanism (CRAM). We find that by implementing a uniform-price auction naval aviation can exactly meet 100% of its retention objectives, while reducing costs in some communities by more than $2,200,000. Additionally, while we find no significant correlation between officer quality and retention costs, we demonstrate the potential for QUAD auctions to improve upon these results by further reducing retention costs and improving the overall quality of retained aviators. Lastly, our implementation of CRAMs reveals the potential to reduce individual retention costs nearly 20% through the use of non-monetary incentives.