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The Wells Fargo incentive pay problem is at least as old as Matthews, Young; and we’ve been advising the banking industry on performance-based incentive compensation for over 40 years.  Decades ago when we discussed design of incentive plans, we would half-joke about avoiding the creation of an employee mindset of “open an account and get a new toaster; open three new accounts and get three toasters”.

Our experience tells us that a cardinal rule of incentives is that you get what you pay for – in terms of employee behavior and results.  If your bank sets new account goals without incorporating a balancing measure like branch customer satisfaction, you are sending a problematic message:  account growth matters and gets rewarded and customer satisfaction does not.  If your incentives are driven by Net Income growth without corresponding Return on Assets / Equity measures, you are telling management that it’s okay to inflate the balance sheet for that extra dollar of profits.   If loan growth is the key to incentive earnings without corresponding credit quality requirements . . . well, we all know where that got us in the recent past!

Business news reports of the Wells Fargo problem indicate that another cardinal rule of incentives may have been violated:  employees must have a reasonable chance of achieving goals and not fear losing their jobs for failing to achieve what they perceive as unobtainable results.  Such a situation will cause some employees to quit trying and others to start their search for different employment.  Or in the Wells Fargo case, employees will find a way to achieve goals even when they know their behavior is inconsistent with customer interests and, ultimately, shareholder return.

We also believe that Wells Fargo’s decision to cancel incentive plans is an over-reaction.  Well-designed incentive plans are an effective management tool to:

  • focus attention and action plans on key results
  • motivate individual effort and teamwork
  • link company and employee success

The Wells Fargo story will fade in the press, but we believe it should be a wakeup call for banks to take a fresh look at incentive plans.  With the new year approaching, now is the time to ask the tough questions:  Are performance measures balanced with respect to growth, profitability, soundness, and customer satisfaction?  Are expectations reasonably obtainable and do employees have the proper tools and training to perform at their best?  Are payout levels competitive but reasonable compared to base pay (e.g., are high incentives necessary for cash compensation to be competitive)?  Are we supporting our incentives plans with effective employee communications that explain expectations for results and behavior?

Matthews, Young has been advising banks, thrifts, and credit unions for over four decades on the use of sound incentive compensation.  We are experienced in the design of new plans as well as the review of existing plans.  Contact us at: Info@MatthewsYoung.com.

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