When Incentive Pay Goes Rogue!

A friend of mine likes to say: “It’s not that incentive pay doesn’t work well, it’s that it works TOO well. It usually does exactly what it is designed to do, even if that wasn’t your intent.”

Wells Fargo just paid $185M in fines and penalties because its employees fraudulently opened additional accounting for people who were already customers. Often when issues like this arise, someone will blame pay programs. When this happens, compensation professionals usually cry foul. But that’s hard to do this time.

The Numbers

$185,000,000 in penalties and fines

2,000,000+ fraudulent accounts

5,300 professionals and managers fired

$124,000,000 “retirement pay” for the executive who ran the problem area

$0.13 per share increase in stock price when this was announced

0 executives who have lost their jobs because of this (so far)

Like any well-designed incentive compensation plan, Wells Fargo’s started with a strong company culture and a simple goal that required special effort. The culture was built on an environment where a customer could, and wanted to, do all of their financial transactions. The goal was simple. Get every customer to have at least 8 financial products through Wells Fargo. It even had a catchy name, the Gr-eight Initiative.” So far, so good.

But in hindsight, perhaps a couple things were missing. Where was the rule that made sure that canceled accounts subtracted from the success earned by opening an account? Where was the team whose counter-incentive plan was based on finding and correcting fraudulent activity on the part of plan participants? Where were the rules that made it clear that management up to the very top, would be subject to pay clawback if it was found that there was any cheating?

I often say that pay can't fix anything, but it can help support and drive decisions, behaviors and results. In this case it seems like pay may have contributed to all three. Once cheating like this happens, without immediate repercussions, it is easy for cheating to become “the way” people do things. It often starts with, “I’m not hurting anyone” and ends with, “This is just how we do it, sure its messed up, but I’ve gotta make a living.”

With the volume like this, it should have been nearly impossible for this to go unnoticed. Two million fake accounts are approximately 5% of the 40 million total accounts that Wells Fargo claims to have. 5% of anything shouldn’t invisible.

In a job market where finding and hiring good talent is difficult, Wells Fargo had to fire 5,300. Assume that their average base pay was $50,000 per year. Just finding and hiring that many people will likely cost more than an additional $53M.

But the newest information (released 9/12/2016) is the most frustrating. I do a lot of executive compensation consulting work and it’s hard to hear that no one may be held accountable for this. The executive who led this area is being allowed to retire with as much as $124M in total rewards when they leave. Wells Fargo did not admit to any wrong doing when they paid the fines and penalties. They have not yet reported that any executive will lose money or position because of this. When people at the top aren't held accountable, it sends a message that perhaps this wasn’t something that they could have controlled. I think everyone reading this article believes differently.

While a pay program contributed greatly this this debacle, blaming compensation without blaming the people in charge is a poor excuse for a solution.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has authored and contributed to many industry resources including a recent issue brief on “Performance-Based Equity Compensation”. He has also co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

Comments

[E. James (Jim) Brennan]

OH, yeah! Well said, Dan. Depressing when the bucks go to those who will not accept another kind of "buck" ... as in, "the buck stops here." Great levels of pay can only be justified by great levels of responsibility.

[Jay Schuster]

It has always seemed to me that pay does not 'lead' misdeeds but can do a good 'follow-up' job. The exception seems to be where government folks decide to 'pad their pay' like they did in a number of the smaller cities around Los Angeles in the last few years. Something seems to happen to some otherwise good people in executive jobs when their own pay is 'at stake'.

The most challenging 'incentive' riddle I have seen occurred during the 'sub-prime crunch' where a number of banks had 'bonus' plans based on the dollor volume of sub-prime loans and had trouble terminating the plans fast enough to stop the 'bleeding'. I wonder if that was an act of dishonestly or just stupidity? One wonders in retrospect.

[Dan Walter]

It was bad enough that the plan was poorly designed and/or executed.

Jay: I agree that pay generally does not "lead" misdeeds. The fact that both the opportunity for misdeeds and the opportunity for pay can be easily linked is usually the problem. We just need to keep reminding people that pay also does not manage people. People manage people.

You can delegate work to those below you, but you cannot, since it is your job, delegate management of those doing the work.

I try to explain it this way: Those below you can be held responsible, but, as leader, you must be held accountable.

[Dan Walter]

Some interesting science on cheating. http://www.inc.com/justin-bariso/why-cheaters-cheat-the-science-behind-the-wells-fargo-scandal.html

[E. James (Jim) Brennan]

Great article, Dan, both your original and the one linked in your last comment. Sometimes the comments provide wonderful further insights. For example, I just LOVE Dan Ariely's books (like Jay's and Pat's) and strongly recommend that everyone in the reward biz read them ASAP!

[Dan Walter]

I love Daniel Ariely's books too. Easy to read and informative.

Here's another article on this topic. This was based in part on an interview I gave (that was inspired by this blog post.)

http://qz.com/784336/the-wells-fargo-scandal-shows-why-sales-commissions-are-so-flawed/

[Dan Walter]

hmmmm http://www.npr.org/sections/thetwo-way/2016/09/20/494738797/you-should-resign-watch-sen-elizabeth-warren-grill-wells-fargo-ceo-john-stumpf