Perverse Incentives! The Motivation Puzzle?

The 1700s…

The British Empire follows a ‘good riddance’ policy of shipping convicts out of Great Britain. These convicts were originally transported to the Thirteen Colonies in North America. However, after the American War of Independence ended in 1783, the newly formed United States refused to accept any more convicts. Thus a plan was made in 1785, to establish a penal colony in New South Wales, on land claimed for Great Britain by explorer James Cook in his first voyage to the Pacific in 1770.


The First Fleet were the 11 ships (two Royal Navy vessel escorts, three store ships and six convict transports) carrying between 1,000 and 1,500 convicts, marines, seamen, civil officers and free people that departed from Portsmouth, England, in May 1787 to found the penal colony that became the first European settlement in Australia. They travelled more than 15,000 miles from England. The Fleet sailed southwest to Rio de Janeiro, then east to Cape Town and via the Great Southern Ocean to finally arrive at Botany Bay in January 1788, after about 250 days without losing a ship. Anchor was cast in what was named Sydney Cove after Lord Sydney, the British Home Secretary. This day is today celebrated as Australia Day, marking the beginning of British settlement. Forty-eight people died on the journey, a death rate of just over three per cent. The final cost of the journey was based on a cost-plus arrangement where the contractor was paid for all of its allowed expenses up to a set limit. The final price-tag, and expensive $110 million in today’s currency!

Back in England, enormous outrage ensued at the expensive bill from the First Fleet. This outrage and the arrival of a new cost-cutting home secretary, the 29-year old Lord Grenville set the tone for reimbursement policies for future journeys.

So it was decided that the Second Fleet would be set up on a fixed-price per head basis, with the contract going to the lowest bidder. The firm, Camden, Calvert & King, which won the contract, undertook to transport, clothe and feed the convicts for a flat fee of £17 7s. 6d per head, whether they landed alive or not. This firm had previously been involved in transporting slaves to North America. Most companies were unwilling to take on that risk, because at the time low standards meant death rates were high and often influenced by chance and the weather. Instead, the contractor was paid for the number of convicts who boarded the ship in England. But payment was not dependent on how many convicts reached the other side. They were also allowed to sell any provisions left over after the journey, which they did. The amount decided upon was much less than the first fleet, promising a cheaper solution to the problem of overflowing gaols at home.

With this arrangement, the Second Fleet set sail on 19th January 1790, with 1,006 convicts. The fleet comprised six ships: one Royal Navy escort, four convict ships, and a supply ship. The escort was disabled en route and failed to make the destination. They stopped just once, at Cape Town. The result was that the second fleet was much faster than the first fleet (which made three stops for fresh provisions), arriving in 160 days, rather than 250. However, in stark contrast to the First Fleet mortality rate of 3% for the journey, of the approximately 1000 prisoners who sailed from Portsmouth, tragically 40% of the convicts on board, died during the journey and in the months after landing.

The Reverend Richard Johnson described the scene soon after the fleet arrived thus: “The misery I saw amongst them is indescribable … their heads, bodies, clothes, blankets, were all full of lice. They were wretched, naked, filthy, dirty, lousy, and many of them utterly unable to stand, to creep, or even to stir hand or foot.”

William Hill, a second captain in the New South Wales Corps who sailed with the fleet, thought the conditions found in the slave trade compared well to the second fleet. The masters of two of the ships, the Neptune and the Scarborough, were cruel, he wrote: “The more they can withhold from the unhappy wretches, the more provisions they have to dispose of on a foreign market, and the earlier in the voyage they die the longer they can draw the deceased’s allowance for themselves; for I fear few of them are honest enough to make a just return of the dates of their deaths to their employers.”

This tragic episode with contrasting mortality rates between the two fleets reflects the trade-offs between price and quality, and how incentives change human behavior. Nowhere are the hazards of perverse incentives more obvious than in the notorious tale of the first fleets heading into Australia. The contract for the Second Fleet reduced opportunities for corruption and political decision-making, but it also decreased incentives for tenderers to do a good job.

Some wrote that “… This is an important lesson: contractual form should follow service function. Contract models suitable for buying pencils and light bulbs will not work particularly well in procuring the delivery of complex human services.” This tragic incident helped strengthen oversight and bring other gradual improvements to help eventually bring the death rates to around 1% by the mid 1800s.

Talking about incentives, Dan Pink in this TedTalk expounds on the puzzle of motivation- and if incentives work in dealing with humans while explaining the ‘Candle Experiment’


Scott Geller, takes it further, on what makes people to be self-incentivized/ motivated and empowered. He goes on to tell a wonderful poem to drive home his point of




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