A critical assessment of the bonus program reform in the Norwegian Armed Forces - towards an optimal bonus scheme

Personnel in the Norwegian Armed Forces (NAF) employed in positions with age dependent skills (health, physical and mental strength) are on contracts ending at the age of 35 (T35 contract). Such personnel are compensated by a bonus of NOK 1.1 million (USD 135.000) at the end of their contract period. The secondary purpose of the bonus is to incentivize personnel to complete their contract, e.g. the compensation also works as a retention bonus. Despite the existence of a retention bonus, the number of personnel completing their contract is almost absent. NAF statistics show that a vast number of personnel quit at the age of 22–24. This wears and tears on the education and training institutions, and leads to vacancies and a reduced level of experience in the operational units. In order to increase retention rates, the retention scheme was revised in June 2020. The crucial adjustment in the retention scheme is to move the first possible bonus payment from 10 to 5 years of service, and to allow the personnel to exchange bonus payments for paid study leave (education bonus). The new scheme is affective in 2024, when the required seniority is attained. However, in order to gain insight in advance related to the scheme, Defence Staff Norway (DEFSTNOR) initiated a pilot among four different units. Participating personnel can choose between money payments and paid study leave already during autumn 2021. The Norwegian Defence Research Establishment (FFI) supports DEFSTNOR in conducting a survey mapping plans and preferences among the personnel attaining the pilot. In this report, we study opportunities and challenges related to the new retention bonus scheme based on the plans and preferences among the personnel and their leaders mapped in the survey. There is uncertainty associated with the number of personnel choosing study leave, and the corresponding challenges due to increases in vacancies. We find, however, that the share of personnel choosing study leave is unlikely to exceed 16%, despite the fact that 60% of all personnel plan for civil higher education. The variation in shares among military units are, however, substantial. By mapping the preferred years for study enrollment, we find that a low number of personnel prefer to study at the time of both bonus payments (5 and 10 years seniority). Our results indicate that education bonus is relatively more attractive to women, also after controlling for the high share of women planning for higher education. We find no support for the hypothesis that personnel will avoid study leave as a response to challenges associated with increases in vacancies. We have estimated turnover intention by mapping respondents plans two and five years ahead. We find that plans for education is the strongest predictor for turnover intention. We find no evidence supporting that commuting increases turnover intention. The personal discounting rate and risk preferences are crucial to outcomes in the labor market. Our findings suggest this being the case also in our sample of personnel in the NAF.