Show me the incentives

In the midst of this wild weekend reading about OpenAI, I was once again reminded of Charlie Munger’s famous quote:

“Show me the incentive, I’ll show you the outcome.”

This implies that if you want to predict someone's actions, you need to understand what motivates them. Incentives are the primary factor in shaping decision-making and behavior.

In companies, it's more often than not the board of directors (BOD) driving the behavior of the organization. Startup founders should never lose sight of this fact, even if they don’t currently have a BOD.

Investor Chamath Palihapitiya had a great thread on what led OpenAI to this point and the importance of corporate structure in aligning motivations and incentives across the organization.

While the details of Altman’s removal are still unfolding, it is becoming increasingly clear that OpenAI’s convoluted corporate structure led to conflicting motivations and incentives within the company. There is a key lesson here. Whether you are a for-profit or non-profit entity, there are tried-and-true corporate structures to help you achieve your stated goals. Because just doing that is hard enough as it is. But once you decide what the goal is, you should work as hard as possible to achieve it; you should never compound unnecessary risk into this journey, like iterating on corporate structure. While it can make heroes out of lawyers, it is one of those unnecessary risks that’s only blindingly obvious in hindsight.

It’s a reminder that even the best and smartest people in the world can forget about basic human behavior. Think about incentives, and then think about them even more. You’ll be better off for it.

What are the incentives for your board, your employees, etc.?