The purpose of the military's transformation effort is to ensure that it has the capabilities it needs to defend the United States against a spectrum of unknown and uncertain threats. Such transformation requires a reassessment of both the military's current manpower and personnel policies and the factors that will affect the continued success of the all-volunteer force over the next decade and beyond. This paper, prepared for the Conference on the All-Volunteer Force After 30 Years, describes how transformation is defined in the military and discusses the likely implications of transformation for military manpower requirements and whether the existing military personnel management and compensation systems support those transformation-related goals. Finally, it examines the types of personnel management and compensation policy changes that might be required. The authors conclude that the major challenge to transforming the military compensation and personnel management systems is increasing the flexibility for managing personnel and supporting a culture of creativity, entrepreneurial activity, and intelligent risk-taking. They examine several compensation approaches: expanded performance appraisals; awards for creativity and innovation; a voluntary duty assignment system; and pay-for-performance schemes.