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This article combines research on incentives with nonprofit organization theories to derive three “nonprofit characteristics” that influence the use and effectiveness of incentive mechanisms in nonprofit organizations: the lack of undistorted contractible measures for the organization’s overall performance, the relevance of identified employee motivation and the social relationships between the organization and its stakeholders. Building on research from social psychology, the article argues for a more deliberate use of implicit (i.e., not contractually defined) incentives rather than a shift toward the increased use of performance contracts. Because implicit incentives are often subtle (without the need of formal justification to others) and emergent rather than planned, managers are frequently not aware of these mechanisms, and their deliberate use creates a major challenge. [ABSTRACT FROM PUBLISHER]