ABSTRACT Effective compensation contract is the most driving force that encourages the operator of the firm to work hard. This article, considering the ability of the operator, built a model of compensation contract with some explanatory variables, such as effort level and risk attitude of the operator, coefficient of input flexibility, and coefficient of discount. Then, it tried to use the principal-agent theory to solve the model of explicit function, and analyzed the model based on material incentive and non-material incentive in the mechanism of profit sharing; the conclusion had important practical significance for the firm to implement the performance management.
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