Free travel passes and cheap train tickets are being given to London Midland passengers hit by cancellations and delays after the Government stepped in.
The package, worth £7m, was imposed after months of problems on routes which cover London, Birmingham, Northampton, Crewe and Liverpool.
The Department for Transport said this was the second time in three years it had penalised the company for not meeting the terms of its contract.
Under this agreement with the firm, season ticket holders with London Midland will receive free travel passes for five days. Another 500,000 extra cheap advance tickets will also be handed out.
The free tickets will be available to all monthly and annual season ticket holders, and weekly ticket holders affected by disruption.
The cheap tickets will be made available over the next two years for passengers travelling on key London Midland routes.
The company has been battling a major driver shortage in recent weeks, forcing it to cancel almost 1,000 trains since October.
Transport Minister Norman Baker said: "London Midland has cancelled or delayed hundreds of services in recent months.
"On repeated occasions, they were not able to provide enough drivers and some services had to be cancelled, with severe delays to services, and they have fallen short both of everyone's expectations and their franchise obligations.
"Securing these benefits for passengers represents a firm yellow card for London Midland and some financial benefit for those who have been hardest hit by their poor performance.
"I am confident London Midland has now rectified their driver shortage but the company need to be clear that we will continue to monitor their performance closely and take firmer action if necessary."
The deal also confirms the franchise will end in September 2015, to ensure the firm has enough time to resolve the driver problems permanently.
London Midland will also have to spend millions improving the resilience of their trains and at least £2.25m on measures to help passengers - mostly in the West Midlands which was affected worst.
Its commercial director, Richard Brooks, said: "While the temporary driver shortage has been addressed, we clearly recognise that recent disruption has been unacceptable to passengers and not what we expect of ourselves.
"From the onset of this issue we ensured that the Department for Transport was kept up-to-date with operational performance and have been working closely with them to deliver a passenger-focused plan which will offer tangible customer benefits.
"These benefits include five free return tickets for season ticket holders, offering half a million additional great value advance purchase tickets and making significant investment in information, safety and performance measures."
"We have taken on-board feedback from our customers in putting together this package and the government recognises that London Midland is best placed to deliver these measures.
"We apologise for the recent disruption and are now focused on returning to our previous high levels of performance."