Assignment
Pay and Strategy Execution at Wells Fargo and "Down Under" (at ANZ): Incentives Gone Awry
Wells Fargo continues to pay the price for scandals that involved it making money by exploiting customers and opening accounts (as many as 3.5 million bank and credit card accounts without customers' knowledge). Most recently, it agreed to pay $575 million to 50 states and the District of Columbia. Prior to that, it paid a $1 billion fine imposed by federal regulators and $480 million to settle a class action suit brought by investors. It is also restricted by the Federal Reserve from getting larger than $2 trillion assets until the Federal Reserve is convinced it has changed its ways.
Customer exploitation appears to have been a consequence of pressuring employees to meet unrealistic, aggressively high sales targets. They used both "carrots and sticks" to drive employee behavior. Meeting sales targets often meant Page 557larger bonuses. Not meeting sales targets could result in losing your job. One way that employees met aggressive sales targets was by cross-selling. Cross-selling refers to the practice of asking existing customers to open another account (e.g., a checking account, a new credit card, a home loan, or a line of credit). However, employees at Wells Fargo went a step further and opened new accounts ("fake" accounts) for customers who did not ask for the accounts. One method, for example, was that if a customer was applying for a home loan, the banker would include a form for a line of credit and hope the customer would not notice when signing all the papers.
According to New York Federal Reserve President Bill Dudley, the "widespread fraud" at Wells Fargo shows the "powerful role-for good or bad-that incentives can play." Wells Fargo reports that it has changed its compensation plan away from a focus on cross-selling as many banking products as possible to a focus on customer service, customer usage, and growth in primary balances.
The problems at Wells Fargo are also a challenge elsewhere. In the Integrity in Action box, we saw that Novartis has limited incentive/bonus payments for high sales performance and now monitors whether the sales were achieved in an appropriate manner. On the other side of the world, the Australia and New Zealand Banking Group (ANZ) recently announced it was taking a more dramatic step and eliminating sales-based bonuses entirely. This comes after customer complaints about wealth management firms alleging that advisers had conflicts of interests, largely due to the incentive system, which led them to give advice that was not in the best interests of the customer (e.g., overextending themselves and/or taking on overly risk investments), but which led to higher adviser pay. ANZ's chief risk officer reported that an audit of past advising indicated that 5% of advice given "failed to meet the requirement that it be in the best interest of the client." Going forward, ANZ has stated that not only will it end bonuses, but also that advisers will be evaluated and compensated entirely on the basis of customer satisfaction, how consistent the adviser is with the bank's values, and how well the adviser minimizes risks and adheres to compliance standards. Advisers who fail two audits of their behaviors will be dismissed. Advisers must also complete training in these areas.
Task
• What effective HRM practices should the organization pursue?
• What has the organization failed to do?