How Charlie Munger designed the Incentives of Munger, Tolles, Olson - Commoncog Case Library

In 1962, famous investor and later on Warren Buffett’s right hand man Charlie Munger formed a new law firm named Munger, Tolles, Hills, & Rickershauser, after defecting from his former firm Musick, Peeler & Garrett. The full circumstances behind that defection is covered in another case, but the brief details are as follows:

This is a companion discussion topic for the original entry at

Wow. This is amazing. I’ve been speculating that this would be an inclusive way of running a compensation system for years, and every time I suggest it in conversation, people tell me I’m an idiot. It feels really good to learn that Charlie Munger, one of the top thinkers about incentives, not only agreed but successfully put it into practice.

For context, I was one of those people who do the often invisible “glue” work that supports others. I wasn’t flashy, but the people doing the work knew I was the person that could get things done. Through most of my career, though, I rarely got compensated for that work, because it wasn’t visible and I didn’t do a good job of taking credit and making it visible. So I dreamed of a compensation system like this one, where people could allocate money towards their coworkers who created value for them, as a way of rewarding the people who do that kind of work.

I proposed this in a leadership Slack last year and basically got laughed off of the Slack. People thought it would be a high school popularity contest, that it would never be fair, and that it would likely be biased because people would only compensate their friends. Of course, the people saying this were people who benefited from the current system where the manager decides everything about compensation, and didn’t realize that everything they said applies to that system as well, with zero accountability and transparency.

I think the transparency part is key, and I had missed that previously. If your votes will be published, you will take them seriously. It reminds me of Semco, which published everybody’s compensation, which forced them to design a fair compensation system where people understood why some people got paid more.

Anyway, fascinating to learn about this example. Thanks for sharing!


Well, you could send them this case and tell them that apart from Munger being one of the most respected thinkers on incentives, MTO is also one of the top law firms in America — most prestigious, most desirable to get into, etc etc. And just about every profile of the firm attributes it partially to their incentive system.

I’m delighted you enjoyed this case, @eric! Incentive Design certainly looks like a promising concept sequence to get into!

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This is fascinating. Curious if you have thoughts on how this could, in principle, scale to 620 partners, or even 6200 partners.

My sense is that perhaps you could do this by practice? But every attempt to segment the group adds a layer of complexity. Scale tends to erode nuance out of incentive schema IME.

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