Charlie Munger on Incentives

Trying to solve a problem that involves human behavior? Take a few minutes and read this interview with Charlie Munger, the Vice-Chairman of Berkshire Hathaway (among many other roles). Through his research and experiences with businesses and workers of all forms, he’s come to recognize the importance of incentives. While the focus of this interview was on the psychology of misjudgment (especially in financial matters), it provides many lessons for marketers, managers, and analysts.

Here’s one of my favorite exerpts:

One of my favorite cases about the power of incentives is the Federal Express case. The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast. And Federal Express had one hell of a time getting the thing to work. And they tried moral suasion, they tried everything in the world, and finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked. 

So, next time you're trying to get someone to do something, take a quick look at the incentives. Ensure they are fair, clear, and tied to the behavior you're trying to cause. If you screw it up, you can expect lack of engagement, low morale, and poor performance. And if you're trying to figure out why a process is broken, look back at the incentives (and perception of them) and you'll likely find the answers for which you've been searching.