Results follow incentives
You get what you reward
FedEx’s overnight delivery service had a problem. Their system depended on one critical choke point. Each night, every package needed to be rapidly sorted and moved between planes at a central hub. If the night shift fell behind, the promise of overnight delivery collapsed. For years, FedEx struggled to get the night team to move fast enough. They tried pep talks, stricter oversight and reminders about customer service. Nothing worked.
Then someone spotted the issue. Night workers were paid by the hour. Hence, the system rewarded taking longer, not finishing faster. So they flipped the incentive. Instead of hourly pay, workers were paid per completed shift and allowed to go home when every plane was loaded and ready to depart. Productivity jumped.
The problem wasn’t motivation. It was misaligned incentives.
Charlie Munger shared this story as part of a speech he gave in 1995. He said, “You don’t have to worry about perverse incentives. They will do their work without anybody’s help.” Six examples that illustrate the power of incentives follow.
1. The cobra bounty backfired
Perverse incentives are perversely effective.
The British government in India paid bounties for every dead cobra. People began breeding cobras for profit. When the program ended, breeders released their snakes, making the problem worse.
2. Rats for cash in French Indochina
If the reward is for the metric, not the mission, the mission dies.
Colonial French authorities in Hanoi paid for rat tails to combat plague. Locals cut off tails and released the rats so they could keep breeding.
3. Frederick Taylor’s shovels
People optimise what you pay them to optimise.
Steel workers used to bring their own shovels. They picked shapes that suited comfort, not productivity. Taylor paid workers by volume moved and redesigned the shovels. Output tripled.
4. Inevitable bank crashes
Bankers are rewarded for making loans, not for the quality of those loans. - Joseph Stiglitz
The 2008 crisis wasn’t a surprise. It was the result of the incentive structure.
5. Unnecessary surgery
When US doctors were paid more for performing hysterectomies, the number of procedures skyrocketed far beyond medical need.
Sometimes over-treatment is a pay plan, not a diagnosis.
6. Gaming the scoreboard
When the scoreboard is flawed, the play becomes flawed.
Southwest used to publish on-time departures. Competitors gamed the system by closing doors early, leaving passengers behind but boosting stats.
Design rewards carefully
Never think about something else when you should be thinking about the power of incentives. - Charlie Munger
Systems gets the behaviour they reward. We can have inspiring missions, clever strategies and passionate people. However, if the incentives point in the wrong direction, the outcomes will too. Misaligned incentives quietly shape behaviour far more powerfully than values, culture or rules.
Other resources
The Psychology of Human Misjudgement talk by Charlie Munger
Five Ways to Play the Status Game post by Phil Martin
What Charlie Munger Taught Me post by Phil Martin
Charlie Munger rounds things up, “Show me the incentive and I will show you the outcome.”
Have fun.
Phil…
Brilliant breakdown Phil. Incentives are one of those foundational principles everyone acknowledges but far fewer actually design for. Your examples show how systems often fail not because people are unmotivated, but because the reward structure quietly pushes them in the wrong direction. A great reminder that outcomes are rarely accidental, they’re engineered, intentionally or not.