This paper examines some unique aspects of public organization associated with the use of incentive systems to enhance performance from the perspective of the economics of organization and, in particular, principal-agent relationships. In terms of political environments as external constraints on public organizations, they have multiple principals in the political marketplace who, rather than prefer a unified objective of efficiency in the public sector, try to influence public agencies to their own benefits. In terms of managerial dilemma as internal constraints, public organizations are supposed to pursue multiple and conflicting goals whose outcomes are difficult to measure. Lack of competition and market disciplines further limits the willingness and capability of public organizations to implement incentive systems to improve performance. Since incentive systems have incentives to fail in the public sector, we should carefully examine the unique political and managerial environments faced by public entities and assess what types of reform in the incentive structure can be successful in what types of organizations.