The effective design of managerial incentive systems : combining theoretical principles and practical trade-offs

This article describes how theoretical developments in the field of agency and contract economics may be of great inspiration for the practical design of incentive- and performance-based compensation systems. Principles and stylized facts arising from the analysis of the principal-agent framework ond the economic theory of teams are presented by means of trade-offs that human resource practitioners should take into account when tailoring compensation systems to the specific needs of a particular organization.