When Massachusetts became the first US state to bar employers from asking candidates for their salary histories in an amendment to the Bay State’s equal pay law last year, some observers predicted that it would be the first of many to do so. Sure enough, others have followed suit this year, including New York City in April and California in October, along with Delaware and Oregon. Democrats in the House of Representatives even proposed a bill last September to ban salary history inquiries nationwide, which they introduced in May in response to a federal court ruling that gender pay gaps based on salary history were not discriminatory.
That bill has virtually no hope of becoming law in the current Congress, but inspiring federal legislation is not the only way that these state and local bans can have nationwide impacts. California, Massachusetts, and New York City represent large labor and consumer markets where most nationwide businesses have a footprint, and to keep things simple, many organizations base their employment policies around the requirements of the most tightly regulated jurisdiction in which they operate. California law is well understood to affect national employment practices in this way: Because it is the most populous state and has some of the most stringent employment laws and regulations in the country, multi-state and multinational employers will often set their US policies to meet California’s standards rather than draft different policies for employees in different states.
New York City’s salary history ban is now beginning to have the same effect.
After the fake-accounts scandal that shook Wells Fargo last year, the bank’s board of directors took decisive action to mitigate the damage and punish those responsible, clawing back tens of million of dollars in stock awards from Carrie Tolstedt, the retiring executive who led the unit where the alleged misconduct occurred, and former CEO John Stumpf. Even more importantly, the bank overhauled the compensation scheme that may have enabled the unethical sales practices at the heart of the scandal and enlisted a law firm to conduct an independent investigation into how these practices came about.
The findings of the investigation, released in April, attributed the emergence of these practices to fundamental problems in Wells Fargo’s business culture, in which executives were subject to too much autonomy and too little oversight. This flaw enabled senior leaders to ignore or minimize problems with the bank’s sales culture and performance incentives until they spiraled out of control.
The challenge for Wells Fargo now is to change its culture to ensure that these bad practices don’t resurface. At Fortune, Geoff Colvin takes an extensive, fascinating look into the cultural course correction the bank’s new CEO, Tim Sloan, is currently in the midst of undertaking:
On Jan. 1 he instituted a new incentive compensation plan in the retail bank that pays employees on the basis of customer satisfaction and achievement of team goals, among other measures, but not product sales goals. The branches aren’t “stores” anymore; they’re branches. No one in the company gets evaluated on products per customer, and after almost 20 years, the company no longer reports that number to investors.
In the aftermath of the fake-accounts scandal that shook Wells Fargo last year, the bank’s board of directors decided to recoup some $60 million in stock awards from Carrie Tolstedt, the retiring executive who led the unit where the alleged misconduct occurred, and former CEO John Stumpf. The scandal also motivated the bank to revamp its compensation practices, which may have precipitated the scandal by creating an incentive for employees to cheat in order to meet their aggressive sales goals. On Monday, the New York Times reports, the board announced that it was clawing back an additional $75 million in compensation from Stumpf and Tolstedt on the same day it released a 110-page report on the findings of an investigation into these problematic sales practices conducted by the law firm Shearman & Sterling LLP.
The report attributes the development of improper sales practices primarily to a culture that gave senior executives too much autonomy and too little oversight, making it difficult for the company to recognize and address the problem before it snowballed into a major scandal:
The root cause of sales practice failures was the distortion of the Community Bank’s sales culture and performance management system, which, when combined with aggressive sales management, created pressure on employees to sell unwanted or unneeded products to customers and, in some cases, to open unauthorized accounts. Wells Fargo’s decentralized corporate structure gave too much autonomy to the Community Bank’s senior leadership, who were unwilling to change the sales model or even recognize it as the root cause of the problem. Community Bank leadership resisted and impeded outside scrutiny or oversight and, when forced to report, minimized the scale and nature of the problem.
The fake-accounts scandal that rocked Wells Fargo last fall was widely attributed to a strategy that was intended to encourage aggressive sales goals but instead ended up creating incentives for employees to cheat, having a toxic effect on the bank’s culture and ultimately hurting its reputation. In response to the scandal, Wells Fargo’s board decided to claw back compensation from certain executives, and on Tuesday, the bank announced that it was changing its pay practices to remove the problematic incentives. CBS News goes through the details:
Wells Fargo’s 70,000-plus front-line employees will no longer receive incentives for meeting sales goals or based on how many new accounts they open. They will instead receive part of their overall salary based on how the products they sell are used, with one component also based on independently measured customer service scores for their branch locations. … Accounts that are used frequently, such as those where customers set up direct deposits or use debit cards often, will be a positive factor for an employee’s pay. Idle accounts will not. An account will only count toward incentives once it’s been open three months.
Employees will also receive more of their overall compensation as a base salary, rather than in one-time incentives and bonuses. A teller, the lowest-level position, will have about 95 percent of his or her total pay as a base. Annual performance raises will be based more on how customers regard and use the branch, and Gallup surveys and mystery shoppers will also provide information.
Meanwhile, the Charlotte Observer reported last week, the bank has also increased the pay of its entry-level US employees from $12 to $13.50 per hour, giving a raise to some 25,000 people. Recently, many other employers have raised their minimum wages or made other employee-friendly changes to rewards or other HR policies and garnered a public relations boost from doing so. Unfortunately for Wells Fargo, Kara Alaimo writes at Bloomberg View, Wells Fargo “doesn’t appear poised to capitalize on the full public relations potential of these changes”:
Wells Fargo’s recent fake-accounts scandal led to demands from critics and members of Congress that the bank claw back pay from Carrie Tolstedt, the retiring executive who led the unit where the alleged misconduct occurred, as well as CEO John Stumpf. On Tuesday, the bank’s board decided to do just that, according to the Associated Press:
The independent directors at the nation’s second-largest bank said Tuesday that Stumpf will forfeit $41 million in stock awards, while former retail banking executive Carrie Tolstedt will forfeit $19 million of her stock awards, effective immediately. Both are also giving up any bonuses for 2016, and Tolstedt will not receive any severance or any other compensation in connection with her retirement, the bank’s directors said. …
The San Francisco-based bank’s independent directors are also launching their own investigation, hiring the law firm Shearman & Sterling to assist them. In their announcement, the independent directors said the moves did not preclude the board from pursuing more salary clawbacks from Stumpf or Tolstedt, depending on the results of the investigation.
Clawbacks of this magnitude and at this level of management are practically unheard of at major financial institutions, as Dealbook‘s Stacy Cowley explains:
The action represented one of the first times since the 2008 financial crisis that a chief executive has been forced to give up compensation. Many large companies have adopted clawback provisions at the urging of regulators and shareholder advocates, but boards have been hesitant to invoke them.
She goes on to remind that “only a relatively small portion of the compensation of Wells Fargo’s executives can be clawed back”:
To Frank Kalman, managing editor of Talent Economy, Wells Fargo’s fake-accounts scandal is an example of how commission-based compensation often fails to drive overall performance as an incentive structure. He compares Wells Fargo’s situation to a similar problem in professional sports:
In Wells Fargo’s case, bankers wanted to meet individual commissions targets based not on organizationwide performance but on amount of new accounts opened. After a while, a single employee figures out a way to game the system, opens a few fake accounts to meet a target, tells a colleague and the culture pervades. Soon enough, the goal becomes not helping Wells Fargo drive new business by creating fake bank accounts, but filling their own real bank accounts with commissions driven by bad behavior. The result: Wells Fargo owes $185 million in fines and has to fire 5,300 employees (not to mention the public scrutiny the bank will have to endure for years to come).
Professional sports are another example of performance-based pay run amiss — although the practice there usually doesn’t lead to criminal accusation. Most professional athletes are compensated generously in their base salaries, but many earn a good deal through performance-based bonuses. A baseball player, for example, might earn a certain bonus if they reach a threshold for number of innings pitched over the course of a season. Another might be rewarded extra pay if they hit a certain number of home runs.
In the wake of the recent scandal over employees creating fake accounts for customers in order to meet aggressive sales targets, Wells Fargo has come under pressure to claw back the incentive rewards of certain executives, particularly Carrie Tolstedt, who led the unit where the alleged misconduct occurred and who retired in July. According to a Bloomberg analysis, the bank could claw back about $17 million in unvested shares from Tolstedt, but not the cash or stock she already owns. At a hearing on Tuesday, members of the Senate Banking Committee pressed CEO John Stumpf to commit to clawing back executive compensation, including perhaps his own—Stumpf said that was for the bank’s board of directors to decide.
Washington Post columnist Jena McGregor takes note of this demand and asks whether Wells Fargo could actually meet it:
Corporate governance experts and executive compensation consultants say that under Wells Fargo’s own clawback provisions, it appears the bank could make a case for taking back executives’ pay. For instance, according to company filings, one thing that could trigger the bank to recoup executive awards is “misconduct which has or might reasonably be expected to have reputational harm to the company.” Says Johnson: “Sure, they can apply [the provisions]. The question is, should they? To do that you need to have the facts. It takes a fair amount of teasing out what really happened.”
Divesh Sharma, a professor of accounting at Kennesaw State University who studies clawbacks, says that if the bank decides to claw back any executive pay, “they’ll be opening themselves up to potential litigation. Clawing back is interpreted as a sign of something going wrong.”