Human capital, bonuses, compensating differentials and Air Force pilot retention

The Air Force spends millions of dollars each year to train its pilots. Upon completion of pilot training, an Air Force pilot has acquired skills which are very marketable in the civilian airlines. Because of this, the Air Force imposes an active duty service obligation on each of its pilot training graduates. When this service obligation expires, many pilots separate from the service to pursue lucrative careers with the civilian airlines. The Air Force has an incentive to know what factors induce pilots to separate from the service so they can respond as manpower requirements necessitate.;The purpose of this dissertation is to examine the determinants of pilot retention and to estimate compensating differentials to stabilize retention rates across various Air Force aircraft categories. To provide the appropriate historical, institutional, and theoretical background, Chapter 1 examines the Air Force's compensation system in light of the economic theory of internal labor markets. Chapter 2 reviews the economic theory of human capital and its relationship to turnover. Using individual data provided by the Air Force Personnel Center and other sources, several logistic regressions and linear probability models are run to estimate the relationship between human capital, pilot salary bonuses, and a pilot's stay or leave decision. The results of the regressions are typically consistent with the economic theory of human capital and demonstrate that pilot bonuses are very effective in inducing pilots to remain in the Air Force. Chapter 3 explores the economic theory of hedonic pricing models and compensating wage differentials. Using attrition rates as a proxy for job dissatisfaction, a model is built to estimate compensating differentials required to maintain stable retention rates across various aircraft categories. Additional models are built to estimate how much additional money is necessary to compensate pilots for various disagreeable job characteristics. Some job characteristics, such as the military operations tempo, require substantial additional compensation whereas other characteristics, such unsafe aircraft, require virtually no additional compensation to induce pilots to remain in the service. Chapter 4 summarizes the results of the previous three chapters and offers a conclusion and recommendations.