Augustus, like the imperator generals before him, garnered the bulk of his political strength from the Roman armies. Loyalty of the various legions in the Late Republic had always been mainly to their individual generals, as opposed to the Senate, or Rome itself. As Augustus emerged the victor in the final civil war to end the Republic, the situation for him was no different, and the settlement of the military issue was of paramount importance.
Soon after his return from Egypt, and the official ascension as Augustus, the issue was at the top of a long list of reforms. According to his own 'Res Gestae' Augustus quickly dismissed as many as 300,000 troops from active service. In this however, he seemingly didn't show preferential treatment to his own armies, but allowed any who wished to retire the right to do so, while keeping the willing men from both his and Antony's troops as part of a new standing army. The remaining legions, some 150,000 men strong, were organized into 28 total legions and spread throughout the empire. This new professional army would be paid a salary directly by the emperor, ensuring loyalty to Augustus, and after 6 AD, payments were to come from a new public treasury (the aerarium militare). Those troops which had been retired from service were given the customary grants of land, but after 14 BC, Augustus instituted a retirement pension for the legions, granting cash payments in lieu of land rewards.
Further organizing the legions as a professional army, the military became an actual career choice for Italian and provincial citizens alike. Terms of service were originally instituted at 16 years to qualify for retirement packages, but this was later extended to 20 years. In so doing, the concept of massive conscripts in times of war, thereby taking citizens from other necessary occupations, was mostly avoided. As an added benefit, this new professional career allowed the common poor new opportunities without being reliant solely on the state welfare system. Though spoils of war could still be shared among the troops, soldiers could now look forward to regular pay without commanders forcing a campaign simply to provide looting opportunities.
At the time of Augustus and through to the mid 1st century AD, it's been estimated that the legions were composed of up to 70% Italian recruits. As time went by and the placement of legions, which were always on the frontiers, was established for long periods, the legions became less reliant on men from the Italian peninsula. Under Claudius and Nero the number of Italian recruits dropped to just fewer than 50%, and that number continued to decline over the next century. By the time of Hadrian, Italians made up only 1% of the total legion compliments. Under Augustus, however, provincial non citizens also had military opportunities in the restructured auxilia. Though the auxilia was still mostly an 'as needed' operation in the early empire, it's been estimated that auxilia soldiers represented at least an equal number of active soldiers to that of the citizen army. The status, however, was ever evolving and it wouldn't be long before they were really a permanent part of the standing army. Auxiliaries could also receive regular pay from the treasury, though at a lesser amount, had similar terms of service and had access to variable retirement benefits. The chief of these benefits could be the rewarding of citizenship, on the non-citizen provincial and his family, making them eligible for all the perks of being a 'Roman'.
To command his legions, Augustus, and each successive emperor, also turned to those closest to them. No longer was command bestowed through the Senatorial hierarchy, but the practice of choosing the best was still sadly ignored. Having close relations to or being an intimate member of the emperors' inner circle usually carried more merit than one's actual battlefield capability. Under Augustus, the bulk of this duty fell to his close friend Marcus Vipsanius Agrippa, his stepsons Tiberius and Drusus (along with his son Germanicus), and even later his grandsons Gaius and Lucius Caesar. In the early empire, unrelated but successful men like Marcus Licinius Crassus (grandson of the first triumvir) created problems for Augustus.
Many generals still viewed military service in the old Republican fashion, where success should be met with triumphs and personal rewards. In the case of Crassus, his exceptional success in the Balkans very early in Augustus' tenure highlighted the potential for disaster. Crassus' demand of a triumph as well as the spolia opima (or ultimate spoils) could've potentially placed the loyalty of the men serving him in serious doubt. During the principate, the legions were to be loyal to the emperor himself and not the Legates who served him. Augustus did possibly grant the triumph but Crassus seems to have been quickly removed from service and essentially disappears from the historical record afterward. Another of Augustus' early governors, C. Cornelius Gallus the prefect of Egypt, lauded himself with rewards. Statues erected with glorifying inscriptions resulting from victories over neighboring tribes and revolting provincials, were a source of both anger and distrust for Augustus. Gallus' behavior led ultimately to his own suicide (by 26 BC), certainly under pressure from Rome.
As the new constitutional arrangements of Augustus began to alter the fabric of Roman government, it was imperative that this Republican military ideology cease to exist. From the incident with Crassus onward, the emperor was solely responsible for the victories of men in the field. If a triumph was due, it was the emperor who received it. Even Agrippa the close confidant of Augustus, perhaps understanding this fundamental change in philosophy more than any other, refused all such personal honors and allowed Augustus to celebrate Agrippa's victories as if they were truly his own. Of course, the emperor, at least in the case of those who were strong enough to pull it off, was exempt from blame in the case of military disaster and these could be blamed entirely on the commanders. Still, the life of a legate could be one of supreme honor, respect and wealth. They simply had to understand the new rules and forego the honors of the Republican era. The emperor further solidified the legions as his own, by ensuring that each legionary swear a personal oath of loyalty directly to him. Essentially the emperor was not only the source of the soldier's pay, but he was truly the commander-in-chief and patron. In the case of Augustus, it didn't hurt that he was considered a living god.