Brian Gubernick explores Charlie Munger's principle that people's behavior follows their incentives, not their stated values. Toyota's problem-solving bonuses created world-class quality, while Wells Fargo's account-opening bonuses generated millions of fake accounts. The lesson: audit what you actually reward, because that's what you'll get.
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Thank you for joining me today. It's Brian Gubernick, and welcome to the No Days Off podcast. We believe that every single day brings a new opportunity to get better. Charlie Munger, Warren Buffett's brilliant, oftentimes pretty blunt partner, who unfortunately passed away a year or two ago at the age of 99 years old, Charlie Munger once said, "Show me the incentive and I'll show you the result." Show me the incentive and I'll show you the result. I think it's one of the more powerful ideas in business and leadership and parenting and relationships, even politics, because when you understand what's truly driving behavior, not what people, you know, maybe say they care about, but what what they're actually rewarded for, when you can understand that, you could predict outcomes rather perfectly in some cases. In today's episode, I wanna break down what this phrase really means. I wanna show you a few real-world examples where incentives worked out perfectly, like beautifully. And I wanna give you a few examples when they backfired, totally backfired. Including, uh, the infamous Wells Fargo scandal that I'm talking about this topic today because I was describing the Wells Fargo scandal just, just last week. Then we're going to wrap up with an action step to help you rewire some of your own incentive, incentive systems in your business and in your team. So what's this phrase mean? Let's start there. When Munger says, show me the incentive and I'll show you the result, he's making an observation about human nature, not just math or economics. People don't do what you expect, they actually do what you incentivize. I first saw this show up years and years ago when I walked into my sales office and I said, hey, first person to set 2 appointments today gets $50. Now, mind you, we had had a week or 2 where we weren't really setting any new appointments. The numbers were pretty poor, and I, I walked in, I said, this $50 bill, whoever sets 2 appointments first gets it. Well, I had 14 people in there. As you can imagine, we had appointments galore that day. Why? Because I incentivized appointments. Now, were those appointments great appointments? They were not, not even close. They were all relatively weak. But again, what I incentivized wasn't strong appointments, It wasn't anything that led to the appointment. It was simply, get me something on the scoreboard. And as a result, I got what I asked for. See, incentives are, are levers, and people are moved by them. They could be financial, like in my example. They could be emotional. They could be status-based. Maybe they're time-saving. Maybe it's just simply comfort. But no matter the format, incentives drive behavior. That's why getting them right is, I think, one of the most powerful tools that a leader or, or an entrepreneur actually has. Now, there are times where this works out beautifully. Toyota had a pay-for-problem-solving incentive. In Toyota's early days, their factory workers were actually given financial bonuses for identifying and fixing any flaw that they had in their production line. So it wasn't just productivity that they were rewarding, it was constant improvement. What was the result? You could probably guess the result. Toyota's manufacturing quality was second to none. It was world-class. They built a culture of continuous innovation because that's what they were paying their people for. Their factory workers were given bonuses for finding and fixing flaws. What a genius move that is. What a great incentive. Costco has some great employee incentives. Costco pays well above minimum wage. They offer full benefits. They promote from within. Why do they do this? Because this structure, this incentive structure, rewards retention and rewards performance. They have one of the lowest employee turnover rates in retail, and they have extraordinarily high productivity per worker. They don't have to spend millions retraining people nonstop. They invest upfront by paying more than everybody else. And as a result, they get long-term loyalty. You know, a third example, I know a business team leader who gave their top salespeople a small piece of profit share based on customer satisfaction, not sales. It's kind of interesting. They got greater profit share if their customers were more satisfied with their service. So it wasn't just based on sales units. So that small tweak for this particular team changed a lot. Instead of chasing deals at all costs, salespeople started acting more like advisors. Why? Well, because the incentive wasn't to just close deals, it was to create a better experience. And in this particular case, sales didn't actually go down, but the opposite direction, because customer lifetime value and repeat and referral type of business went up dramatically. Again, they were incentivizing customer satisfaction. Now, as great as it is to have incentives go the right direction, there are times when they go wrong. I mentioned Wells Fargo. Wells Fargo not too long ago was rewarding their employees for opening new accounts. But not for necessarily doing it ethically. They had over 3 million fake accounts created. Customers were charged fees that they didn't authorize. The company ended up paying billions in fines because, again, Wells Fargo incentivized their employees to, to open new accounts, but they didn't have any, any guardrails around that. So incentives without accountability could actually lead to corruption. That's what we saw happen with Wells Fargo. We see it happen with police quota systems. In some precincts, they would reward officers based on the number of tickets issued or the arrests made. Well, you could probably guess what happened. The officers started over-policing, over-policing especially minor offenses, just to make sure they were hitting their numbers. And that really could spiral out of control. Uh, public trust erodes. Because the incentive wasn't to protect and serve, it was able— it was to hit these metrics. And so when the mission and the measurement don't match up, the mission ends up losing. There was a, a third example. There was a SaaS company, a tech company that, uh, that I'd once been chatting with, and, and I know that they gave bonuses based on number of signups, not the number of active users, the number of signups. So the, the Team Blue ad budgets just to spike their, their top of funnel growth, the number of signups. Meanwhile, their churn, the number of people coming out the other side not leveraging the product anymore, not being active, their churn was through the roof. They actually weren't building a business. They were building a PowerPoint slide for investors. They wanted to show top of the line revenue and, and new bit— new active people coming through. And they didn't focus on delivering great service and retention. So they had massive churn. What was the lesson? The incentive should have been aligned with the real objective, not just the easiest number to track. So as we start to wrap up, if you're leading a team, if you're running a business, or if you're just trying to manage your own self, your own habits, here's your homework. I want you to audit your incentives. I want you to ask yourself, What do I reward? What do I reward? What do I track? And what do I celebrate? Think about your business or yourself. What do I reward? What do I track? What do I celebrate? Because people will follow those signals. If you're getting results you don't like, I mean, don't always blame the people. Maybe blame the incentives. And start to change them. As Charlie Munger said, never ever think about something else when you should be thinking about the power of incentives. I don't think that's just a strategy. I think it's business survival. And so, I want to challenge everybody to run through an audit of your own incentives and see where you land. That's all I have for you today, the No Days Off Podcast. Thank you so much for listening. And remember, every single day, brings a new opportunity to get better. So let's get after it.
