A Dynamic Model for Optimum Bonus Management
RAND CORP SANTA MONICA CA
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This report formulates an economic framework for managing the military bonus program, in which bonuses serve two functions to create permanent pay differentials between specialties and to reduce temporary shortages. The dynamic adjustment model determines the optimum time path of bonuses for different year groups in a specialty, subject to the constraint that deviations from the desired manpower inventory be eliminated over the assigned period. The optimum structure of bonuses minimizes the sum of two costs--bonus cost incurred to reduce shortages and penalty cost assigned to shortages and overages. Concepts currently used as rules of thumb by bonus managers, such as criticality, training costs, and substitutability are parameterized in the model through demand, supply, and production functions. The solution methodology and results of the computer simulation are presented. They demonstrate that the policy prescribed by the optimization model results in substantial savings, relative to a year-group management or a no-bonus policy.
- Administration and Management
- Humanities and History