Incentive Design

Incentives can make or break a system’s efficiency. Charlie Munger illustrates this with two powerful examples:

1. FedEx struggled with their night shift until they changed the pay structure from hourly to per-shift, allowing workers to leave once the job was done. This simple tweak transformed their operations.
2. Xerox’s puzzling sales pattern was solved when Joe Wilson discovered misaligned sales commissions. These stories teach us that the right incentives can solve seemingly intractable problems. It’s not about forcing people to work harder, but about creating an environment where their natural motivations align with the company’s goals.