During combat, individual soldiers are either killed or disabled (which both count as casualties in the morale system). However, being disabled is better. When disabled, it means the individual will not participate in the rest of the battle, but can in future battles or if the line is pushed back. If the individual is killed, its killed and lost for good (until healed).
Units can also be damaged. Damaged lowers their effectiveness in combat for that battle, but like disability, heals for free.
In combat, when a platoon kills/destroys half of the opposing platoon, the opposing platoon is morale broken, causing the platoon to flee and the winning platoon to gain experience. A unit that is morale broken, when it fights again, will fight to the death.
Again, a unit performing a morale break gains experience. Two morale breaks promotes a Recruit to Regular. Four more morale breaks promotes the Regulars to Veterans. Eight more morale breaks promotes the unit from Veteran to Elite.
Promotions makes the unit fight better. Elite units can heal hurt in combat.
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Morale
There is also a global morale system. Everyone starts at 100 Morale Points, which is "Steady". Morale levels beneath Steady result in penalties while going higher than steady results in bonuses. If a player's army is "Heroic", it can be commanded to not to withdraw from combat if morale broken.
When an army is Broken, units will surrender when morale is broken. Half the cost of the unit will go to enemy. Veteran and Elite units will not surrender at broken.
When an army is Shattered, units will
change sides when morale broken. Veteran and Elite units will surrender if morale broken.