Gain-sharing, success-sharing and cost-based transfer pricing: A new budgeting approach for the US Department of Defense

Once the dust settles and so called ‘core’ DoD support activities are defined, the issue of incentives must be addressed. Do current budgeting systems inadvertently punish cost-savings? Does cost-based ‘transfer pricing’ offer a viable alternative? This paper by Francois Melese offers some answers. It also pioneers the application of an analytical OR approach to budget and incentive problems. A new budgeting proposal is introduced to help govern peace time relationships among operating forces and internal support activities. This new budgeting approach integrates cost-based ‘transfer pricing’ with the popular business practice of ‘gain-sharing’ and a novel incentive program called ‘success-sharing’. The combined budgeting and incentive package is designed to improve the management of financial resources and business operations throughout the DoD.