This paper proposes a framework of the incentive mechanism of innovation. The “bandit problem” is embedded into the principal agent model to study the incentive mechanism of radical innovation and incremental innovation. The study finds that the optimal contract that implements radical innovation rewards long-term success, but not short-term success. On the contrary, it may even reward short-term failure. In addition, incentive mechanism of radical innovation also includes persistent commitment to a long-term incentive plan, and timely feedback on performance. Specific measures include "golden parachute", managerial entrenchment, and legal protection of bankruptcy that is benefit for debtors, etc.