I've written about incentive systems before, and about a closely related topic, feedback systems within organizations. I just heard cute story about an incentive system that back-fired.
A youth soccer coach wanted his team to score more goals, so he got a bunch of silver dollars, and offered his team members a silver dollar for each goal he scored. The less ambitious girls played as before, but those more in tune with the new incentive modified their play: they stopped passing to their teammates, preferring to try to dribble to the goal on their own. A couple of the most aggressive and most talented players took to stealing the ball from their teammates so that they could try to score.
Could this happen is modern corporation? I've seen sales representatives incented on volume, not profit. They wanted to negotiate price cuts for most every customer.
I've seen business unit managers incented on profit margin. They turned away opportunities to increase total profits when those opportunities would have lowered the average margin. (Example: you have sold $1000 worth of stuff, with expenses running $900, for a 10% profit margin.) You have the opportunity to sell another $100 worth of stuff, at an expense of $95. That additional sale has a profit margin of only 5%, so the manager declines it. However, he's giving up an additional $5 of profit just to make his ratio look good.)
General rule: be very careful in designing an incentive system. Assume that your people (especially your sales reps) will game the system. As a general rule, measure and incent what you really want. If you want profit, don't incent volume.