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The incentive may have seemed ordinary when Wells Fargo management first issued it. But it led to some extraordinarily negative consequences.
Wells managers imposed what was sometimes called an "Eight is Great" target for their employees: sell eight accounts per customer. This type of cross-selling, in which bank employees encourage account holders to open another account, take out a credit card, or buy other services, is a common method for companies in the banking industry to increase their revenue.
But in late 2016, according to news reports and testimony before the U.S. Congress, company representatives publicly conceded that the incentive resulted in disaster. Over a period of at least five years, Wells Fargo employees created more than 1.5 million unauthorized deposit accounts, and at least 500,000 unauthorized credit card applications.
The Wells Fargo case was a clear example of a perverse incentive—an incentive that results in unintended and undesirable consequences contrary to the interests of the incentive designers.
For HR, it's important to recognize that all incentives have the potential to turn perverse, says managerial incentive expert Marc Hodak of Farient Advisors.
"Every incentive to perform is an incentive to cheat. You can't have one without the other," he says.
In practice, the majority of incentives or performance targets in the business world do not turn perverse, despite the potential to do so. Why so with Wells Fargo?
Hodak says that a few factors came together in the Wells case, and collectively they sustained a "perverse incentive ecosystem."
"Any one of the factors individually wouldn't have resulted in the debacle [that happened]," Hodak explains.
One crucial factor, Hodak says, was an unrealistic goal. While cross-selling is common in the industry, eight accounts per customer, even as an aspirational goal, does not seem realistically achievable on a widespread scale.
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