Where Wells Fargo Went Wrong
Since the subprime mortgage crash of 2008, big banks have been under intense scrutiny by both federal regulators and the public. They have slowly been trying to rebuild confidence in their services, but are facing another large setback. On September 8, 2016, the Consumer Financial Protection Bureau (CFPB) fined Wells Fargo $100 million because employees of the bank created unauthorized deposit and credit card accounts across the country in order to collect financial bonuses for themselves. Many may see it as yet another problem with big banks, but it highlights a larger issue: the dangers of poorly monitored incentive-compensation programs.
In the case of Wells Fargo, the company built an incentive-compensation program that made it possible for employees to meet incentive goals by secretly signing up existing customers for new services that were never requested. The employees would misuse customer names and personal information to create new checking and credit card accounts to inflate their fee income, which meant they would get larger bonuses. These issues resulted in roughly 1.5 million deposit account openings which were unauthorized.
Incentive-compensative programs can be a useful tool to motivate employees, reach new sales targets, and grow your business. When used appropriately, employees feel empowered and become personally invested in the performance of the company. However, when not applied properly (like appears to be the case of Wells Fargo), employees may feel pressured to meet unrealistic goals. Whether due to a high stress corporate culture, unrealistic sales goals, or poorly reviewed incentive programs, employees may be pushed to the point of fraud.
There are ways to monitor an incentive-compensation program to prevent a large scale problem:
- Are the incentive goals achievable? Benchmarks should be lofty, but not unattainable. It is hard to keep shooting for a target you cannot see!
- Is there a culture of honesty and integrity? If an employee has found a way to meet the incentive goals through unethical means, is the behavior strongly discouraged or it will be prohibited in the future? Consider how you want to be represented to your customers and the public. If an issue has been discovered, be clear that unethical behavior to meet incentive goals will not be tolerated. Implement controls to prevent such occurrences in the future.
- Do the goals discourage teamwork? When incentive compensation is tied to group performance, an employee may become frustrated if there are perceptions of unequal contributions among group members. Group incentive compensation programs should set overall objectives, including individual’s specific roles in meeting those objectives, to prevent misunderstandings.
- Are the incentives competition based? These programs may inspire high performance on an individual level, but may also lead to employees sabotaging the efforts of their teammates to the detriment of the company overall. Try to structure these incentives to be reward-based, or external focused, such as making more sales than your top competitor.
- Does the incentive reinforce the right behavior? If your company’s mission is to provide excellent customer service, is your incentive program based on how many new customers you obtain? Or should it be based on customer retention? Be cognizant of matching your mission and goals to obtain the best result from the incentive program.
Incentive-compensation programs, when left unchecked, can have major consequences. When used appropriately, they could provide significant benefits. Individuals want to be given the chance to succeed, and incentive-compensation programs can be the catalyst for innovation and increased productivity. How do they work for you? Join the conversation, comment below.
Update: Jan. 11, 2017
Wells Fargo announced that they have changed their incentive program, much like the above article proposed.