Abstract: Analyzes the characteristics of software R and D to develop a principal-agent model for the project managers and R and D team members. The solution to the model offers the R and D staff the choice of equilibrium efforts and gives an optimal incentive coefficient to project managers under horizontal monitoring, and it in turn offers the optimal monitoring effort to project managers under vertical monitoring. The optimal incentive/monitoring mode for R and D staff is further discussed by way of comparing the equilibrium solution to the basis incentive model with that to either horizontal or vertical monitoring model. Then, the best behavior of both principal and agent under either horizontal or vertical monitoring and its influencing factors are analyzed in depth with some conclusions drawn.