News out of Washington indicates that politicians are surprised that the recent tax cuts are not working out as intended. Are any incentive compensation experts shocked by this?
The failed Wells Fargo incentive plan and Tax Reform are similar. Both designed with specific goals in mind. Both depended on participants doing as designers planned. Both were missing essential yet straightforward elements that would have helped avoid problems.
The Tax Cuts and Jobs Act (PL 115-97) was sold as a type of prepaid incentive plan for corporations and individuals. On the corporate side, the US agreed to cut tax rates, and companies agreed to be motivated to spur US hiring and raise wages. Like many (poorly designed) incentive plans, there were no hurdles or requirements for companies to receive the new tax savings.
The government didn't require any specific level of net new hires. The government didn't require that wages increase by some minimum amount over a prescribed period. There were very few requirements at all. It was more like Field of Dreams, "If you build it, they will come.”
Dreams are great, but they shouldn't be the foundation of the primary source of national revenue any more than they should be the foundation for building your company’s revenue.
The failed Wells Fargo plan focused on the benefit of opening new accounts. The CEO stated that eight accounts per person were the right number, because “eight is great.” It seems that no one was specifically required to ensure those accounts were needed, valuable, or even real. The metric was “more accounts,” the goal was “eight.” Plan designers, I am sure, thought the plan was clear and that people would not cheat. But success depended only on the expectation that people would do what the plan intended them to do. Incentive plans seldom work when founded only in dreams and hope.
For decades we have been taught that "hope is not a strategy."
The results of tax reform have been mixed. It is far too soon to know if it will accomplish its stated goals. But, we do know that initial surge of stock buybacks and $1,000 bonuses (at some companies) were not advertised as goals and not touted as successful outcomes.
The Wells Fargo plan has cost the company hundreds of millions of dollars. It has cost people their careers. And, in the end, most of those fantastically opened accounts cannot fix the problem caused by a simple error in design and expectation.
Like tax reform, view your new incentive plan through more than just your "hoped for" perspective. Listen to the naysayers and work to build a framework to address their concerns. Get thoughts from objective outside observers and incorporate their ideas into program design, execution, and communications.
Clearly outline guide rails, hurdles, and set minimum requirements that define the path and foundation of achievement. Without them, you are destined to be surprised when your incentive plan works too well at doing what you didn’t realize you designed it to do.
Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and considered a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation.