The American military's personnel shortage is now sufficiently severe that a few academics, lawmakers and military commanders are suggesting it may be time to revive the draft. Not only would this fill out the crews of aircraft carriers, they say, but it would also re-instill a sense of national public service.

Unfortunately, the staffing challenge facing the military cannot be addressed simply by rotating millions of entry-level recruits through a year or two of national service. Like most large companies, the military faces a war for talent – that is, a battle to recruit and retain officers and enlisted personnel with the intellectual flexibility, technical abilities and communication skills needed today. If it does not fundamentally rethink the way it attracts, develops and retains people, it will lose this war.

As with many businesses, the problem is retaining talented midlevel people – something a draft could not address. But the military's challenge is actually tougher than that of most companies. Why?

First, military leaders uniquely lack the latitude to hire, promote or fire their "employees." Talent development is centralized, and it gets short shrift, since officers and enlisted personnel rotate every few years.

Second, the "fundamental value proposition" – what employees get for what they give – is badly out of whack. Pay, housing and medical benefits and access to tax-deferred savings plans must be improved. But that's just the tip of the iceberg.

The military's sweeping downsizing from 1989 to 1996 was more traumatic than any corporate experience, because senior-level military skills aren't transferable. An important part of the armed forces' appeal used to be the tacit understanding that the military would look after its own. But that has now been utterly corroded, severely damaging morale. Meanwhile, junior officers are very attractive to private companies, compounding the problem.

There is also the fact that the military is handcuffed in hiring. When companies lose talent, it's not a major crisis. They can hire people at any level. The military cannot. All its senior people must be developed from boot camp up. Thus the military must be world-class at "people development." It is not.

Take the Army. Its Officer Personnel Management System emphasizes the preparation of battle commanders through set assignments – though just a small fraction will now proceed to such commands.

It enshrines a belief in the ability of "generalist" commanders to hold any position – as if a successful division commander is also qualified to manage logistics or politico-military affairs. And its most fundamental principles – "up or out," by which people are either promoted or forced to leave, and mandatory early retirement – are designed to maintin an Army exclusively of the young and vigorous, an idea that made sense in World War II but is increasingly irrelevant today.

There is only one path to the top, which means too many officers competing for too few command opportunities. Quickly, a vicious circle develops that discourages cooperation and initiative. Reports suggest the other services' officer corps are in similar shape or worse. What is to be done?

First, all the services must proceed in the direction the Army is at last moving in – toward a broader definition of professionalism and success that employs multiple career tracks.

Second, policy makers should modify the up-or-out/early retirement policy to a carefully monitored up-and-stay approach – that is, letting people stay at their natural level if they are not deemed promotion material. The current system's benefits – regular new blood, advancement for the winners – are entirely outweighed by the expense of discharging highly trained officers and the damage that forced attrition does to commitment.

Third, the military should pay for performance. Merit-based pay everywhere would do much to keep the best on board.

These are long-term changes that will be hard to implement. But what's the alternative? The draft won't help. The American military must move now. To lose the war for talent is to accept a second-rate military in which America's most capable men and women do not choose to serve.

David McCormick was a lieutenant in the Persian Gulf war and is the author of The Downsized Warrior. He is a former consultant with McKinsey & Company.