How Not to Become the Next Wells Fargo

Author: 
Paul Nolan

John Stumpf had a favorite slogan: “Eight is great.”

The former Wells Fargo CEO wanted everyone who did business with the bank to have eight different products. If you opened a checking account with a Wells Fargo banker, Stumpf wanted you to have a savings account, a line of credit and a business line of credit as well. While you’re at it, who’s servicing your mortgage? And wouldn’t it be wise to get another credit card?

But eight wasn’t only the number of accounts Stumpf wanted every customer to have. According to former Wells Fargo employees who were interviewed following the scandal that broke this fall, eight was also the number of accounts personal bankers were expected to open every day. “You’d be calling friends and asking, ‘Please let me open you an account. I don’t want to be in here on Saturday,’” one former banker told reporters from the National Public Radio program “Planet Money.”

Things caved in on Stumpf and Wells Fargo in September when it was reported that state and federal agencies were investigating the bank for fraudulent activity. It turns out employees signed up customers for 2 million accounts they did not authorize and Wells Fargo charged more than $1.5 million in fees for those unwanted accounts. Wells Fargo fired 5,300 employees, mostly entry-level and middle managers. The New York Times reports that bank employees had informed bank executives of sham accounts being opened as early as 2005, the year Stumpf became the bank’s president, and the bank reportedly fired employees in 2011 for similar actions.

Incentives take a hit
The Wells Fargo brand has taken a beating and Stumpf, 63, resigned after several weeks of showing how not to lead a company through a crisis. But the bank is not the only one that’s been bruised. Many stories on the debacle focused on the bank’s incentive program, which rewarded employees who hit daily and monthly targets, and punished those who didn’t. (Wells Fargo quickly announced it was eliminating sales goals, incentives for opening new accounts and some of the cross-selling strategies that led to the mess.)

“The key to success will be a new culture built around a more balanced approach to managing sales,” wrote marketing and sales consultant Sally E. Lorimer along with Andris A. Zoltners and PK Sinha of business consulting firm ZS Associates in an online post for Harvard Business Review. “This new approach will require using tools other than incentives — for example, interesting work, enhanced processes for selecting salespeople and managers, training and coaching, information sharing, empowerment, teamwork, manager assistance and supervision, and improved performance management systems — to motivate salespeople and guide and control sales behaviors. Other companies would be wise to take the time to examine their own sales culture and ask whether incentives might be clouding otherwise good judgment.”

Nick Clements, who left the world of consumer banking to create MagnifyMoney.com, a price comparison website, wrote on Forbes.com, “When properly designed, incentives can align the goals of employees with their employers. But incentive schemes do not live in a vacuum. The corporate culture that accompanies incentives can have a meaningful impact on how employees behave. Often, incentives can lead to cheating and the destruction of shareholder value. Without proper systemic controls and a strong corporate culture, the temptation to cheat (in order to avoid termination) can influence decisions.”

A sure sign of amateurs
However, in a separate Forbes.com article, business coaches Bill Fotsch and John Case state, “The problem doesn’t lie in incentives or any other specific practice; it lies in how those practices are implemented and managed.”

Precisely, says Tim Houlihan, vice president of the Reward Systems Group at BI, a global engagement agency that helps companies drive performance, in part through the use of incentive programs.

“From an industry insider, this smacks of a do-it-yourself project. Someone inside Wells Fargo came up with what they thought was a good idea and executed it without proper vetting,” Houlihan says. “People who don’t normally design incentive programs were given authority to develop a plan, appropriate budget and write the rules without oversight. Such a plan is amateurish if it didn’t take into consideration the potential consequences of the activities and the rewards.”

Houlihan says businesses that follow some basic strategies when structuring their incentive programs will avoid the traps that Wells Fargo fell into. (See his three key tenets of incentive programs here)

Company values must be at the core
Stumpf’s initial response to the media and when he appeared before members of Congress was to accept accountability personally, but he followed that up quickly with statements blaming rogue employees who were not monitored carefully enough. That rubbed a lot people the wrong way.

“This was an epidemic. This was not a few rogue employees,” says Dan Ariely, a behavioral economist who has written books on cheating and, most recently, motivation in the workplace. “It was a part of the culture to say we are willing to do things that are not permitted by the rules for our own financial well-being.” Ariely said he closed his own personal accounts in response to the banking scandal.

In his new book “Payoff: The Hidden Logic That Shapes Our Motivations,” Ariely writes that commitment from an employer to long-term relationships with its employees sets a foundation for peak employee performance. Incentives can work when implemented correctly, but not if workers are uncertain about the stability of their jobs. Many former Wells Fargo employees reported that managers made it clear if you missed your quota too often, you would lose your job.

“Reward and recognition programs should be anchored in fostering company values and delivering on the brand promise to the recipient,” adds Sean Roark, president of the Incentive Marketing Association (IMA), an umbrella organization for businesses that serve the non-cash incentive marketplace. “It starts with setting clear, measurable, value-creating goals; providing the right tools and training; and consistently measuring both the business results and process results. Consistently communicating these results is essential. If you meet your sales goal, but the process is flawed, you won’t create the employee engagement needed to serve the customer.”

Is money a motivator?
It was widely reported that many of the 5,300 Wells Fargo employees who were fired were entry-level personal bankers who earned less than $40,000 per year and relied on the bonuses that were tied to hitting sales quotas to subsist on.

A number of those who have studied workplace motivation and the use of incentives have stated over the years that a competitive salary is necessary before any additional incentives are likely to work long term. But once a certain income has been hit, additional money is not always a powerful motivator.

Ariely has conducted numerous studies to determine whether cash or non-cash incentives work better. “We’ve spent years searching for ways to experiment with real employees at their workplaces. We wanted to study bonuses because almost all companies use some type of bonus, yet despite their ubiquity — and the fact that compensation is most businesses’ largest expense — little is known about how effective bonuses really are. Even less is understood about what forms of payment work best,” he writes in “Payoff.”

Ariely reports in his book that he was able to study a group of workers at a semiconductor production facility at Intel. Ariely created four separate groups in which one group of workers was offered cash for reaching a daily manufacturing quota; another was offered the equivalent value in a voucher for a pizza they could enjoy with their families; a third was told if they met or exceeded their goals they would receive a text message from their boss; and a fourth group was offered nothing at all. The incentives were only offered on the first day of the work week. All groups returned to no incentives the rest of the week.

Not surprisingly, a group of HR managers predicted that the group offered cash would be the most motivated on that first day, followed by the pizza voucher, the compliment and then the group that received nothing. True to form on the first day of the study, the three groups offered incentives outperformed the group that was not offered anything. However, the pizza voucher group boosted productivity by 6.7 percent, almost identical to the 6.6 percent boost from the verbal reward. Of the three incentives, cash performed the worst, coming in slightly behind at 4.9 percent.

More interesting to Ariely was the drop-off in performance by workers in each of the groups through the rest of the week. The compliment group’s performance fell over the course of the next several days to nearly mirror the control group that received no incentives. The cash incentive group dropped their performance well below the control group on the second day of the experiment and, though they rebounded slightly the following three days, stayed below the control group’s performance for the full week. The performance of the pizza group fell over the next three days between the monetary bonus condition and the compliment condition.

“Different types of motivations don’t add up in a simple way,” Ariely states. “In particular, adding money to the equation can backfire and make people less driven. We often assume people work for pay, and that more compensation will translate into greater output. These results suggest that there is a lot more to work than merely the opportunity to earn money in exchange for labor.”

“It’s important to remember that incentives and compensa­tion are two different things, and confusing them is what gets organizations in trouble,” agrees IMA President Sean Roark. “Cash is often perceived as compensation rather than an instrument of motivation/appreciation, which is the definition of an incentive. When cash is equivocated with compensation, it becomes something that is due, not a gift given as a message of engagement, appreciation or motivation.”