Thursday, September 15, 2016

An incentive plan fiasco at Wells Fargo

NC State online MBA students have been studying incentive plans this semester.  The main motivation behind such plans is to change employee motivation to generate additional net income for the employer.

This week's revelations about Wells Fargo show how a poorly designed plan can backfire.  WF wanted its employees to cross-sell more accounts, e.g. get someone with a checking account to take out a mortgage.  Employees ended up with aggressive sales targets and thousands of them created new accounts without the customer's knowledge so that they could collect bonuses.

Maryland Smith Professor Clifford Rossi argues that none of the traditional lines of defense against such behavior held.  Line managers did not hold front line employees accountable until it was too late.  Corporate risk management missed all signals as well, ditto for internal audit.  According to WSJ, only 10% of the 5000+ employees who have been fired were at the branch manager level or higher.  No senior officers have departed yet.

While the plan was in effect the number of Wells Fargo products per household rose from 5.5 to 6.4 over a four year period.  And the four year period was 2009-2013, not exactly a time when people were taking out second mortgages to buy a new vacation home.

NYU finance prof Kermit Schoenholtz argues in the New Yorker that enforcement of financial regulations depends on bank self-monitoring.  Right now, that "mechanism isn't working."  Fines are supposedly designed to punish wrongdoing and send a message that banks will pay a stiff price if caught.

Wells has been fined $185m.  Net income in the 2nd quarter of 2016 was $5.6 billion.  The CEO John Stumpf still has his job.

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