The U.S. military is one of America’s premier leadership factories. But the product it manufactures is in decline.

Seven years ago, the number of young officers willing to recommit after their initial tours of duty dropped precipitously. Before the Iraq war, three-quarters of Army officers stayed for a career, a number that dropped to just two-thirds starting in 2006. The broken pipeline was initially blamed on the sputtering war effort in Iraq, but in fact the problem is a deep-rooted one. The Army has bled talent for decades, a consequence of a deeply dysfunctional organization that poorly matches jobs with talent and doesn’t trust its officers to make choices about their own careers.

The solution, however, isn’t beyond reach. The next step in the evolution of the Pentagon’s leadership system should be what I call a “total volunteer force”—one that treats officers as human capital with autonomy rather than as physical capital in inventory.

Let me explain. The retention crisis, even in an era of cutbacks and sequestration, is a decades-long dilemma that the military doesn’t often talk about. The Senate investigated the “critical and delicate” problem of a military brain drain as far back as 1954, after President Eisenhower called for Congressional action. Yet after public attention flared following a 2011 survey of junior officers, retired U.S. Army general Frederick Kroesen mocked the issue in the publication ARMY, declaring that “no other profession has developed better ways to identify, develop and reward its leaders.”

There is at least one top military leader who will talk about the problem. In a farewell address to the cadets of West Point in Feb. 2011, former secretary of defense Robert Gates, admired for his service under Presidents Bush and Obama, expressed his frustration. He wondered how the Army “can break up the institutional concrete, its bureaucratic rigidity in its assignments and promotion processes, in order to retain, challenge, and inspire its best, brightest, and most-battled tested young officers?”

Sec. Gates understood something that neither the Army nor its critics do. Critics like to think that the most talented young leaders simply leave, whereas many generals refuse to admit any problem exists. The real problem is that the talent is bleeding inside the organization. High quit rates are just a symptom of the deeper problem that too many military members are mis-matched with their jobs.

In truth, military officers are only volunteers for one day: the day they sign up. Afterwards, they’re treated with the same kind of inflexible, coercive management that has defined militaries since history began. No electronic “job boards” list openings for the thousands of available jobs in the Army, Navy, Air Force and Marines. No junior officers know where their next job assignment will be, or if it will fit with their interests, strengths and talents. And no commanders are trusted to directly hire the subordinates they feel their teams need.

Rather, junior officers are generally limited to rank-ordering the base locations they prefer. Commanders are limited to making a “by-name request” of some officers, but this is more often than not ignored by higher-ups. Labor supply is coordinated with labor demand by large bureaucracies that haven’t changed much since Harry Truman was president in the 1950s.

Why does this nonsensical and anachronistic approach persist? The mantra from the central planners in the bowels of the Pentagon has always been that the “needs of the military come first.” That’s dumb. Smart organizations in the private sector have learned that putting employees’ needs first—ahead of corporate ones—only seems unproductive to short-term thinkers. Just look at the way Silicon Valley companies pamper their talent because of how it helps to maximize the bottom line. Compulsion just won’t work in today’s labor market.

Unfortunately, most career generals think that only coercion will get fighting men and women to enter a war zone. But that’s an insult to our troops. Many generals in the 1960s warned that without a draft, the Army would never attract enough volunteer soldiers during a shooting war. Iraq and Afghanistan proved them wrong. It is motivation, not intimidation, that wins battles.

The military has changed before, and it can change again. As the Army shifted from a conscripted force to an all-volunteer one following the Vietnam War, productivity, retention, motivation and labor quality increased. Today, for example, roughly 97 percent of military enlistees are high-school graduates, which is 17 percentage points higher than the civilian average. And contrary to conventional wisdom, there are three recruits from America’s wealthiest neighborhoods for every two from its poorest ones.

Since the 1950s, America’s defense budget shrank from 17 percent of GDP to less than 4 percent today. The Pentagon has historically responded by doing more with less, focusing on quality instead of quantity. It has learned how to motivate the workers who remained, cultivating independent judgment and adaptability as key skills among its youngest officers. Now it’s time to make the Pentagon’s talent management as flexible and adaptable as its talent.

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To create a “total volunteer force,” I believe the Pentagon needs to radically reform. That will mean giving commanders, rather than bureaucrats, hiring authority. It will require the Pentagon to establish a job board which allows qualified officers and enlistees the freedom to apply for any open position. And it will mean instituting substantive evaluations that recognize merit more than seniority.

Finally, there should be no more “force shaping” with incentives paid to soldiers who retire early. Rather, there should be a free market that lets officers leave if they cannot find a military billet and allows former officers to return to the ranks if a commander will hire them.

It seems odd to explain to the guys in charge of our missiles that this isn’t rocket science. But leadership is about more than producing great leaders. Great organizations trust those young leaders, too, especially when it comes to managing their own careers.

Tim Kane is the chief economist of the Hudson Institute in Washington, D.C., and served as an intelligence officer in the U.S. Air Force. His most recent book is “Bleeding Talent: How the US Military Mismanages Great Leaders and Why It's Time for a Revolution.”

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