Recipe for Business Underperformance? Misalign Incentives

Misaligned incentives are a surefire way to stall a business. Salespeople stop chasing deals. Engineers drag out projects. Customer service reps leave issues unresolved. When the reward system doesn’t match the goals, even the hardest-working employees struggle to perform.

FedEx learned this lesson the hard way. In the early 1970s, founder Fred Smith had a bold vision: to build a company that could deliver packages overnight, reliably. But there was a problem. Night shift workers at FedEx consistently missed sorting deadlines. Despite all the training, motivation, and reminders, delays were common. The entire operation started to feel shaky.

The Problem: Time vs. Results

The issue was simple: workers were being paid by the hour. Whether they worked quickly or slowly, the pay was the same. Why rush? The clock kept ticking, and so did their earnings. This system created no urgency. And with no urgency, deadlines were missed. Packages got delayed. FedEx’s promise of reliability was at risk.

The Fix: Pay for Performance

Fred Smith and his team knew they had to change something fast. The solution? A new pay structure. Instead of hourly wages, night shift workers would now be paid for completing their shift. The faster they sorted the packages, the sooner they could leave. More efficiency, more reward. The change was immediate. Sorting times improved. Workers moved faster. Bottlenecks disappeared.

This wasn’t just about speed; it was about ownership. Workers now had a direct reason to care about how quickly they worked. The better they performed, the more they benefited. FedEx finally started delivering on its promise: on-time, every time.

Why Incentives Matter

As Charlie Munger famously said, “Show me the incentives, and I’ll show you the outcome.” FedEx is a perfect example. When you tie rewards to performance, people naturally step up. The shift from hourly pay to per-shift compensation didn’t just boost efficiency—it gave workers a reason to care. And that’s the secret to good business: getting people to care about what they’re doing.

This principle applies to every industry. Sales teams who aren’t rewarded for closing deals won’t chase leads. Engineers paid by the hour may take their time instead of finishing a project. The outcome always reflects the incentive.

Conclusion: Aligning Incentives for Success

FedEx’s success was not just about logistics or planes—it was about understanding people. When Fred Smith aligned his workers’ incentives with the company’s goals, everything changed. Performance skyrocketed. Efficiency improved. And FedEx became a global leader in logistics. 

For business owners, the lesson is clear: if you want your people to perform at their best, you need to give them the right incentives. Make sure they see a direct link between the work you expect of them and their reward. When you get this right, you unlock the full potential of your team. Just like FedEx did.