The diversity of today's military operations, the threat of a major war, and plans for modernization draw attention to the crucial role of defense personnel and, supporting them, well-functioning personnel and compensation systems. Recently, concern has arisen regarding military pay and retention's ability to meet force needs. In this documented briefing, the authors provide a detailed analysis showing that (1) there is a pay gap for officers and senior enlisted personnel, but not for junior enlisted personnel, when their basic pay growth since 1982 is compared to wage/salary growth of similar civilian populations; (2) overall, military pay has declined by 6.5 percent relative to civilian pay since 1993, though the "official" pay gap shows a decline of only 1.5 percent; (3) this pay decline and low unemployment rates have contributed to retention and enlistment difficulties; (4) measured by the extent of long or hazardous duty (perstempo), retention had not declined despite the heightened pace of military operations in the mid-1990s; yet, today's pace may be even higher and, if so, could have a negative retention effect on more personnel; (5) over time, military personnel and compensation systems have been effective in retaining high-quality personnel and promoting them into higher ranks by providing incentives for high-quality personnel to remain in the military and seek advancement. The authors also discuss policy options aimed at ameliorating personnel concerns. They conclude that pay raises targeted to those in higher grades supplemented by well-funded separation pay incentives, selective reenlistment bonuses, more cost-effective recruiting policies aimed at college-bound youth, and, if desired, offering a thrift savings plan without matching contributions from the government to help service members tax-shelter income for retirement are the best options. Targeted pay raises can help reduce the senior enlisted personnel and officer pay gaps and should strengthen the incentives for high-quality personnel to remain in service and exert the effort needed to reach higher ranks.