Today's military forces are being called upon to engage in a wide variety of small- scale contingencies yet remain in readiness for major theater wars. In addition, the military forces have embarked on a far-reaching program of modernization that will introduce new weapons systems over the next decade and beyond. The diversity of today's military operations, the threat of major theater war, and the program of modernization all draw attention to the crucial role of defense personnel and, supporting them, well-functioning personnel and compensation systems. These systems should be capable of efficiently recruiting, training, keeping, and motivating the number, quality, and mix of personnel needed to meet manning requirements. Recently, however, concern has arisen regarding military compensation and retention, prompting proposals to increase military compensation and in some cases modify its structure. In this documented briefing, we review the current pay and retention situation and then provide an analysis of certain military compensation policy options. This research was conducted for Personnel and Readiness within the Forces and Resources Center of RAND's National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the unified commands, and the defense agencies.