Our employees are our most valuable asset," many companies claim. Are they right? Yes and no. Valuable, certainly; many business leaders and management thinkers believe that only a small number of people in every company are responsible for creating a major part of its wealth. But an asset? Not really; as economists would say, a corporation has no rights of possession over its employees. And the corporate assets—property, plant, and equipment—that traditionally conferred power over workers are less effective with knowledge workers, who carry most of their tools with them when they walk out the door each day.

Rather, corporations and their top talent—which doesn’t just mean that at the top of the hierarchy—are engaged in a kind of joint venture or partnership, a relationship whose future both sides continually evaluate. As in any relationship, both sides need incentives if they are to cooperate. And even in the closest partnership, there is competition to capture value.

The design of incentives, both financial and non-financial, is therefore a critical skill for tomorrow’s managers. In industries such as software and wholesale banking, effective incentive systems and financial structures for delivering incentives have long been recognized as an important source of advantage....