Is the Wells Fargo Scandal a Lesson in Incentives?

Is the Wells Fargo Scandal a Lesson in Incentives?

Wells Fargo announced this morning that it was eliminating its product sales goals after revelations that employees had created millions of accounts without customers’ authorization cost it $185 million in fines from the Consumer Financial Protection Bureau and $5 million in refunds. The bank also fired 5,300 employees for opening fake accounts. The sales goals, which pushed employees to “cross-sell” at least eight financial products to each customer, are believed to have played a role in the scandal by giving them an incentive to cheat.

In remarks to the Wall Street Journal on Tuesday, the bank’s CEO John Stumpf “defended the firm and the efforts it had taken to stop the behavior”:

“There was no incentive to do bad things,” Mr. Stumpf said in an interview with The Wall Street Journal. He called the conduct that led to last week’s settlement with federal and local authorities “not acceptable,” adding that the bank doesn’t “want one dime of income that’s not earned properly.” …

He later said through a spokeswoman that when the bank falls short “I feel accountable and our leadership team feels accountable—and we want all our stakeholders to know that.” Rather, Mr. Stumpf said that some employees didn’t honor the bank’s culture. “I wish it would be zero, but if they’re not going to do the thing that we ask them to do—put customers first, honor our vision and values—I don’t want them here,” he said. “I really don’t.”

To Bloomberg View’s Matt Levine, this looks like an example of an ostensibly smart sales strategy gone horribly wrong:

In the abstract, you can see why Wells Fargo would emphasize cross-selling of multiple “solutions” to customers. It is a good sales practice; it both indicates and encourages customer loyalty. If your customers have a checking account, and a savings account, and a credit card and online banking, all in one place, then they’ll probably use each of those products more than if they had only one. And when they want a new, lucrative product — a mortgage, say, or investment advice — they’re more likely to turn to the bank where they keep the rest of their financial life.

But obviously no one in senior management wanted this. Signing customers up for online banking without telling them about it doesn’t help Wells Fargo at all. No one feels extra loyalty because they have a banking product that they don’t use or know about. Even signing them up for a credit card without telling them about it generally doesn’t help Wells Fargo, because people don’t use credit cards that they don’t know about. Cards with an annual fee are a different story — at least you can charge them the fee! — but it seems like customers weren’t signed up for many of those. This isn’t a case of management pushing for something profitable and getting what they asked for, albeit in a regrettable and illegal way. This is a case of management pushing for something profitable but difficult, and the workers pushing back with something worthless but easy.

At Quartz, Oliver Staley characterizes it as a mismatch between the company’s internal and external values—in other words, between the ideals leaders espoused in words and those generated by the underlying incentive structure:

Wells Fargo doesn’t just have a mission statement. It has a 37-page “Vision and Values” brochure that explains, at length, how the bank puts its customers first. The document uses the word “trust” 24 times. …

A corporate culture can be influenced by the words and actions of its executives, and mission and value statements can help set a tone. But virtuous words are unlikely to overcome the more powerful emotions of fear and greed. Like all economic actors, bank employees respond to incentives, and if the culture rewards sales at all costs, and punishes those who fall short, it’s not surprising that employees will cut corners. If a company is serious about ethics, it will adjust its expectations of employees to make sure they’re obtainable. A good company creates an incentive structure that rewards the behavior it wants.

Dan Walter offers a similar interpretation at Compensation Cafe:

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. …

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.

The problem of toxic incentives in the financial industry is hardly unique to Wells Fargo, Rana Foroohar points out at Time:

Consider a study released last year by law firm Labaton Sucharow and the University of Notre Dame, looking at fraud in the financial sector in both the US and the UK. According to the survey of 1,200 professions, “47% of respondents find it likely that their competitors have engaged in unethical or illegal activity in order to gain an edge in the market. This represents a spike from the 39% who reported as such when surveyed in 2012. This figure jumps to 51% for individuals earning $500,000 or more per year. More than one-third (34%) of those earning $500,000 or more annually have witnessed or have first-hand knowledge of wrongdoing in the workplace. 23% of respondents believe it is likely that fellow employees have engaged in illegal or unethical activity in order to gain an edge, nearly double the 12% that reported as such in 2012.”

Clearly, the culture of finance hasn’t changed post 2008–it’s the likely hotspots for fraud that have. The fact that Wells employees were opening false credit card accounts to jack up sales figures likely reflects the fact that while Dodd Frank financial regulation has curbed some risky trading, banks are now looking at new profit centers in consumer banking. The pressure on employees to perform (apparently by whatever means necessarily) will only increase, since bank profit margins are being compressed not only by regulation, but by the current low interest rate environment, which makes it tougher for them to make money on loans.