Competence First, Incentives Second

If you get an Uber, a Lyft, or a cab, you may think you don’t need to watch the road because you’re not the driver. After all, your and your driver’s incentives are aligned: neither of you wants to die in a car crash. His incentives are even stronger than that: he doesn’t want as much as a scratch in his car, whereas you don’t need to care about that as long as whatever causes the scratch doesn’t hurt you. So you’ll be safe, right?

Not necessarily. Aligned incentives mean nothing when your driver is incompetent. A bad driver is either aware of his incentives but still bad enough at driving that he cannot live up to them despite best efforts, or so bad he doesn’t even care or think about his incentives. Therefore, with a bad driver, you do need to keep your eyes on the road and monitor your situation, maybe even tell him to stop the car so you can get out immediately if it isn’t safe.

In other words, incompetence cancels out incentives. Think about this when hiring people. First, establish their competence – then align incentives, in that order. Offering a share of your profits to your salesman only helps if he’s competent. If he’s not, he may want that share, but he won’t be able to deliver anyway. On the other hand, if he is competent and the incentives are aligned, you can relax and go for the ride without having to keep your eyes on the road.