Problem-Solving Application Case—Incentives Gone

Wrong, then Wrong Again, and Wrong Again

The Wells Fargo scandal demonstrates how a company’s choice and implementation of

performance management incentives can have disastrous side effects. This activity is important

because it illustrates why managers must never implement an incentive scheme without

considering as much as possible any and all effects that it may have on employees’ behavior.

The goal of this activity is for you to understand the link between the details of Wells Fargo’s

incentive scheme and the employee behaviors that resulted from it.

Read about how performance incentives led to scandal at Wells Fargo. Then, using the three-

step problem-solving approach, answer the questions that follow.

Money is an important tool for both attracting and motivating talent. If you owned a company or

were its CEO, you would likely agree and choose performance management practices to deliver

such outcomes. It also is possible you’d use incentives to help align your employees’ interests,

behaviors, and performance with those of the company. After all, countless companies have used

incentives very successfully, but not all. The incentives used by Wells Fargo had disastrous

consequences for employees, customers, and the company itself.

The Scenario and Behaviors

A client enters a bank branch and opens a checking account. The performance expectations of

the banker that helped open the client's checking account was that the banker needed to open

eight accounts for each customer, which meant he or she needed to persuade that customer to

open seven additional accounts! This resulted in the banker then attempting to open a savings

account and maybe a credit card account, simple enough. But the problem happened when the

customer left without opening additional accounts and many bankers did so anyway—without

the customer’s consent. Customers who had mortgages with the bank sometimes had insurance

policies opened without their knowledge. The bank also financed automobiles for many

customers, and insurance was also often added unknowingly to these. Small business customers

were frequently overcharged for credit cards and other services. More generally, customers for

one product were cross-sold other products, and along with many of these additional accounts

were fees. The increased number of accounts helped employees meet their numbers, and the fees

provided still more income for the bank.1

Even after all of these efforts, many bankers still fell short of their goals and opened accounts in

family members names. One branch manager opened 24 accounts in her teenage daughter’s

name and 21 in her husband’s. Other reports include Wells Fargo bankers canvassing employees

at stores in which they shopped.2 Pet insurance was added in some instances!3

Some sham accounts were closed once the employee received credit, but many remained open,

charging fees and affecting customer’s credit.

The Damage to Customers and Employees

Wells employees created approximately 3.5 million fake accounts; even now precise numbers

are difficult to obtain. But it seems as if 1.5 million deposit and 500,000 credit card accounts

were opened without customer consent, and it erroneously foreclosed on over 400 mortgages and

repossessed thousands of cars. Over 800,000 customers with auto loans were charged for auto

insurance.4 The list goes on.

The negative consequences within Wells Fargo also have been enormous. CEO John Stumpf

was ousted along with former head of community banking, Carrie Tolstedt. Seventy-five million

dollars in compensation was clawed back from these two executives, as it was considered ill-

gotten and due to illegal or at least unprofessional behaviors. The same executives lost additional

millions in compensation, and approximately 5300 employees were fired. Numerous regulatory

agencies fined Wells Fargo for nearly $200 million, the company’s stock underperformed its

competitors’, and it is difficult to estimate the cost of damage to the company’s reputation and

the resulting lost business.5 And then there are the incalculable cost to customers—money,

frustration, ruined credit, lost vehicles, and lost homes.

The Culprits

Much of this carnage has now been attributed to perverse incentives and poor leadership.

Investigations revealed that both Stumpf and Tolstedt were well aware of these unethical

behaviors, but they turned a blind eye or even encouraged these behaviors. It was reported that

Tolstedt repeatedly denied and resisted complaints about goals being unachievable and

problematic.6 But what about the thousands of employees that actually opened the accounts?

When writing about the Wells Fargo scandal, Professor Elizabeth Tippett noted, “research

suggests that ethical behavior is not about who you are or the values you hold. Behaviors are

often a function of the situation in which you make the decision, even factors you barely notice.7

Another interesting detail regarding performance expectations is that the eight-account

expectation for every customer was only three 10 years earlier. It also is important to note that

this sort of cross-selling—multiple products to the same customer—was something Wells was

known for and contributed to its past success. It’s been reported that the reason for eight instead

of another number was that CEO Stumpf said it rhymed with “great.”

Actions

To be fair, numerous examples exist of Wells Fargo management explicitly instructing

employees not to engage in such activities, including ethics training and the deployment of risk

professionals to identify and correct inappropriate conduct. But this obviously wasn’t enough,

and even though employees were expected to report any misdeeds, they didn’t. Incentives stayed

in place and employees continued to be pressured and even fired if they did not make their sales

quotas. Some involved in the scandal argued it isn’t the employees’ fault, they needed a

paycheck and this is what their employer required.8 Tim Sloan, who worked at Wells for

decades, was inserted as the new CEO and charged with cleaning up the mess, restoring the

bank’s reputation, and warding off a potential new $1 billion fine.9

Sloan worked in the role for two years before stepping down in 2019, presumably for not being

able to turn things around.10 Whoever replaces him has the same challenges. Assume you are the

new CEO, what would you do?

Footnotes

1. M. Egan, “The Two-Year Wells Fargo Horror Story Just Won’t End,” MoneyCNN.com, September 7, 2018,

https://money.cnn.com/2018/09/07/news/companies/wells-fargo-scandal-twoyears/index.html.

2. S. Cowley and J. A. Kingson, “Wells Fargo to Claw Back $75 Million from Two Former Executives,” The New

York Times, April 10, 2017, https://www.nytimes.com/2017/04/10/business/wellsfargo-pay-executives-accounts-

scandal.html.

3. M. Egan, “The Two-Year Wells Fargo Horror Story Just Won’t End,” MoneyCNN.com, September 7, 2018,

https://money.cnn.com/2018/09/07/news/companies/wells-fargo-scandal-twoyears/index.html.

4. G. Morgenson, “Wells Fargo Forced Unwanted Auto Insurance on Borrowers,” The New York Times, July 27,

2017, https://www.nytimes.com/2017/07/27/business/wells-fargo-unwanted-autoinsurance.html.

5. E. Wolff-Mann, “Every Wells Fargo Consumer Scandal Since 2015: A Timeline,” YahooFinance.com, August 8,

2018, https://finance.yahoo.com/news/every-wells-fargo-consumer-scandalsince-2015-timeline-194946222.html.

6. S. Cowley and J. A. Kingson, “Wells Fargo to Claw Back $75 Million from Two Former Executives,” The New

York Times, April 10, 2017, https://www.nytimes.com/2017/04/10/business/wellsfargo-pay-executives-accounts-

scandal.html.

7. Elizabeth C. Tippett, “How Wells Fargo Encouraged Employees to Commit Fraud,” The Conversation Media

Group Ltd., October 7, 2016, https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-

66615.

8. M. Corkery and S. Cowley, “Wells Fargo Warned Workers Against Sham Accounts, but ‘They Needed a

Paycheck,’” The New York Times, September 16, 2016, https://www.nytimes.

com/2016/09/17/business/dealbook/wells-fargo-warned-workers-against-fake-accounts-but-they-needed-a-

paycheck.html.

9. CBS This Morning, January 25, 2019.

10. R. Merle, “After Years of Apologies for Customer Abuses, Wells Fargo CEO Tim Sloan Suddenly Steps

Down,” The Washington Post, March 28, 2019, https://www.washingtonpost.com/business/2019/03/28/wells-fargo-

ceo-tim-sloan-step-downimmediately/?utm_term5.27bf62d146f8.

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