Incentives | Kaelan

Charlie Munger said it simply: “Show me the incentive and I will show you the outcome.” People respond to what they’re rewarded for, not what they’re asked for. The CEO who is paid quarterly will optimize quarterly. The salesperson paid on volume will sell volume, not value. The academic rewarded for publications will publish, even when they have nothing to say.

This seems cynical but it’s really mechanical. Incentives are the selection pressure on behavior. Over time, behaviors that are rewarded proliferate; behaviors that are punished or ignored die out. The system converges toward whatever the incentive structure rewards — intended or not.

The problem isn’t that incentives exist — any system has them. The problem is the gap between designed incentives and actual incentives. Managers design formal incentive structures: bonuses, promotions, performance reviews. But informal incentives also operate: what actually gets noticed, who actually gets ahead, what behaviors survive.

The informal usually wins. A company can officially value innovation while actually punishing failure. The formal incentive says “take risks”; the informal incentive says “don’t screw up.” People learn which incentive is real. goodharts law and the mcnamara fallacy are both special cases: incentives warping behavior toward the measured rather than the meaningful.

Changing behavior means changing incentives, not changing exhortations. You can’t moralize your way to different behavior when the incentive structure rewards the old behavior. This is why organizational change is so hard — the incentive structure has hundreds of components, most invisible, and they resist being moved.

The practical discipline: when you see persistent behavior you don’t understand, look for what incentive is producing it. Somewhere, someone is being rewarded for exactly what you’re seeing. Find that incentive, and you’ve found the lever.