Human Capital & Careers

Incentive Comp: Lessons Learned from Wells Fargo

A year after the fake-accounts scandal broke, here's a look at how companies can avoid negative fallout from sales incentive compensation programs.
Steve GiustiOctober 17, 2017
Incentive Comp: Lessons Learned from Wells Fargo

It’s already been more than a year since the fake-accounts scandal at Wells Fargo came to light. The matter not only led to the removal of the company’s CEO and other top executives but also left a trail of lawsuits and a significantly damaged brand reputation in its wake.

Steve Giusti

Steve Giusti

Yet, despite the massive public embarrassment and heavy penalties it caused, the lessons of this debacle have yet to permeate many top organizations.

While some observers pointed a knowing finger at a sales incentive compensation process run amok, the financial institution’s model should not shoulder the blame. It performed exactly as it was designed, driving associates to cross-sell at least eight accounts per customer. It was culture, not compensation, that was to blame.

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Be it the CEO who was publicly noted as coming up with the idea of “Eight is Great,” or an overly aggressive head of community banking, somewhere along the line there was a systemic cultural breakdown. It was so dramatic that leaders apparently encouraged employees to secretly open 3.5 million unauthorized bank and credit card accounts in order to meet sales quotas.

We saw similar losses of cultural sanity at Enron in 2001 and last year with incentive compensation breakdowns at Harvard University’s endowment fund and the California National Guard. We’ll undoubtedly see more examples.

Sales compensation is often a discipline that falls somewhere between sales, HR, and finance. But recent events as well as the upcoming effective date of the new ASC 606/IFRS 15 revenue recognition standard, which includes new commission expense accounting rules, should move it to the top of a CFO’s awareness list. Not only is sales compensation one of the biggest line items in many corporate budgets, there are potential pitfalls that can cause material harm.

So how can you assure that doesn’t happen under your watch? Start by asking a couple of tough questions.

Does Our Plan Establish Realistic Goals? 

Sales compensation plans drive behavior. A well-designed plan supports key business goals, helps drive sales rep performance, and increases forecasting accuracy.

But if a plan establishes overly lofty goals tied to outlandish reward structures, it can encourage widespread bad behavior. It’s hard to fathom exactly what was happening within Wells Fargo, and whether execs really believed these inflated expectations were realistic — and in the best interest of their customers.

Again, it’s all about cultural breakdown. It’s fine for an organization to establish aggressive goals, but its compensation plans must align with both corporate values and those of the industry at large. And all of that needs to start by asking what behavior you hope to drive and engineering the sales plan from there.

To achieve this, make sure to involve a wide variety of people from multiple disciplines in developing the plan. Don’t do it in a vacuum. You’ll want financial, human resources, legal, and sales performance management experts, among others, at the table. That way, if a top executive suggests quadrupling new customer sales by overinflating plans, you’ll be more likely to have someone calling “time out” to consider the true implications.

Is Our Plan Transparent Enough?

Some companies devise sales incentive compensation plans in back rooms, or perhaps even on the back of the CEO’s cocktail napkin. Then they automate bad plans across the organization — a recipe for disaster.

For a plan to be truly effective, finance and sales executives must not only agree to what’s in it but also have real-time visibility into how reps are tracking to it. How is the plan performing? Who is making their numbers and who isn’t? What’s the standard deviation? Having this information gives sales leadership and reps the context they need to do a better job and compete more effectively.

At the same time, providing full transparency into how people are performing serves as a check on questionable or bad behavior. For example, one rule of thumb says you should expect about 60% to 70% of sales reps to perform at or above their quota. Had Wells Fargo been transparent about performance, I’m guessing someone would have questioned how so many reps were meeting these new goals.

But equally as important, the right checks and balances have to be in place, and someone has to be analyzing the outcomes. There should have been a “look back” at all new accounts created to see if they were truly active, how many had been quickly closed, and whether the customer was seeing any real value.

After all, are you paying a sales-team member to close a deal, or to establish and maintain a long-term relationship with a customer?

Steve Giusti is corporate controller and a vice president at Xactly, a provider of cloud-based incentive compensation solutions.