Incentives: The True Architecture of Organisations
Published on December 03, 2025
Most investors learn one simple rule early on: never take a company at its word. They don’t read press releases to understand a business. They read balance sheets, cap tables, and term sheets — because those documents reveal the real structure of the game: where risk sits, who captures upside, and which strategic behaviours are financially rational.
Organisations are no different.
Values pages, mission statements, and culture decks are corporate PR. They describe how a company wishes to be perceived. But if you want to understand how an organisation truly behaves, you don’t study what it says — you study what it rewards. Promotions, bonuses, safety from blame, visibility, career leverage. These incentives form the real load-bearing architecture of organisations.
Show me the incentive and I’ll show you the outcome. — Charlie Munger
When the architecture of the organisation and its mission align, energy converts cleanly into progress. When that architecture is askew, negative outcomes emerge.
I have long had a strong interest in incentives. Incentives are the reasons people do things — why they get out of bed, go to work, study, build companies, or take risks. At a fundamental level, they shape human behaviour.
Companies, including software companies, are made up of humans. And because humans respond to incentives, the outcomes of organisations can be explained, not only by their formal structures or processes, but by the reward systems embedded within them.
This lens differs from the traditional process-first view. Process attempts to correct behaviour by prescribing what should happen. But processes are aspirational, relying upon adoption, interpretation, and compliance. They describe intention.
Incentives explain what does happen and why. They describe reality.
Alignment is the condition where an organisation’s stated goals, incentive structures, and actual behaviour all point in the same direction.
In an aligned organisation, what is said, what is rewarded, and what is done are congruent. Feedback loops reinforce the stated mission rather than undermine it. Effort converts cleanly into progress with minimal waste.
Misalignment does not happen overnight. Like timber slowly warping under sustained load, it is a gradual, often imperceptible process that ratchets distortion by degrees. This process I call — Drift.
Drift is the slow, often invisible movement away from alignment — caused not by deliberate choice, but by the unexamined accumulation of incentive load: status, short-term planning, personal risk-avoidance, and optimisation for surrogate measurements.
Most companies begin in a state of high alignment. Early teams are close to the mission, close to the product, close to outcomes, with a stake in success. But as organisations grow, they drift, powered by emergent perverse incentives.
A perverse incentive is any incentive that reliably produces outcomes contrary to the organisation’s stated goals.
Consider a manager in a large software organisation. Prestige, security, and scope often grow with headcount. It becomes rational for him to optimise for team size rather than for mission impact. The behaviour makes local sense — even if it erodes global clarity.
Or consider an organisation where engineers are rewarded for creating new internal libraries and having them widely adopted, regardless of whether new abstraction is necessary. In such a system, it becomes rational to produce tooling rather than simplify systems. The engineer optimises for the promotion path. Complexity quietly compounds.
No one in these examples intends to damage the mission.
Drift emerges because, in the absence of direct responsibility for outcomes, the organisation’s architecture rewards surrogate signs of progress.
Over time, as Drift beds in, resources are diverted from outcomes to optics. The organisation now operates in structural misalignment with its mission, with outcomes increasingly driven by surrogate signals rather than primary purpose.