When Gordon Bethune became chief executive of Continental in October 1994, the airline ranked last in most of the industry’s performance measures Reported. He told the story of the turnaround in his book From Worst to First. The best evidence on why one part of it worked comes from two economists who studied it afterward.

What Continental did

In February 1995, Continental introduced an incentive scheme that promised monthly bonuses to all 35,000 of its hourly employees in any month the company achieved a firm-wide performance goal Published. It was one goal for the whole company, not a goal for the gate agents or the mechanics: one number for everybody, paid to everybody.

On paper, that shouldn’t work. With 35,000 people sharing a goal, one employee’s effort barely affects whether the bonus is paid, so theory predicts people will coast: the free-rider problem.

Why it worked

Marc Knez and Duncan Simester studied the scheme and found it did raise employee performance. Their explanation: employees worked in autonomous groups, like the crew at one airport, where people could see each other’s work and pressed each other to do their part. They call it mutual monitoring. The firm-wide bonus gave every group the same reason to care, and the small group gave each person someone watching Published. Continental went on from last in most performance categories to winning more J.D. Power customer satisfaction awards than any other airline Reported.

Pay everyone on the same kept promise, in teams small enough to see each other work.

What a DTC brand can take from it

• One shared number. The perfect-order rate or the index from chapter 3, not a goal per department. A warehouse paid on speed and support paid on response time each hit their number while the order goes wrong between them.
• Monthly, paid close to the month. A bonus paid next February doesn’t change a Tuesday in April.
• Small teams that see each other, like a packing shift or a support pod, so mutual monitoring can work.
• A number that’s hard to game. On-time alone can be bought with worse packing; the weighted index can’t.
• Include the 3PL, with the index in the contract and a monthly credit or bonus attached.

Does it pay?

Say 25 people each get $75 in any month the perfect-order rate beats target: $22,500 a year if it’s hit every month. At the cost tool’s default, where each point of failure rate costs about $18,900 a year, the bonus pays for itself if it takes about 1.2 points off the failure rate, say from 6% to 4.8% Derived. Publish the number daily where the team can see it, the way FedEx sent its SQI to every site.

Do this

• Pick the one number and publish it daily for a month before attaching money, so the team trusts the count.
• Price the bonus against the cost tool and propose it at the next budget meeting, with the failure-rate reduction it needs to pay for itself.