Rewards refer to the positive outcomes that are associated with good behavior. Based on this thinking, reward systems are often used by organizations as a way of motivating their workforce so as to increase productivity. This is based on the assumption that as the individual employees reach their goals, the organization gains as a whole (Cascio, 2018; Lawler & Jenkins. 1992 ). Organizations need a motivated workforce. Over time, it has been proven that motivation is one of the best ways of helping a company to realize its goals. The importance of rewards systems in the motivation of employees cannot be overemphasized. Wells Fargo is one of the organizations in which reward systems have been employed in this pursuit.
Wells Fargo and its Reward System
Wells Fargo was established in 1852 in California and rose to become one of the largest financial institutions in the United States (U.S) (Bhatt, 2014). The bank’s total assets are estimated at 1.95 billion dollars and in July 2015, the bank was briefly named the largest bank in the U.S. Despite these achievements, the firm’s reward systems have come under criticism. Over the years, Wells Fargo has been rocked by several scandals, mostly centered on fake accounts. The firm has thus seemed to ride out the many storms that have rocked it while trying to manage its status as one of the best run and largest financial institutions in the world (Bhatt, 2014).
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According to research carried out by Workstride, an incentives firm , incentive programs increase productivity by 22% on average. The firm also states that 33% of all sales made in the U.S are as a result of incentives. It is for this reason that firms in the U.S have emphasized this method of employee motivation. By providing rewards-based motivation systems, numerous companies have been able to grow their sales dramatically over the years and across many sectors of the economy (Cascio, 2018). However, this tactic is not infallible. Numerous organizations in the past have taken this tactic too far leading to the collapse of the moral fabric of organizations from within (Markham, 2015; Kerr, 2014). Wells Fargo is one such firm.
Before the scandal, Wells Fargo was one of the largest financial institutions. The practices by bankers within the organization had even driven the bank to become the biggest bank globally for a short period in 2015 (Verschoor, 2017; Verschoor, 2016). However, when the scandal broke in 2016, all the gains that had been made were eroded and the company's reputation severely affected. Unethical business practices in the banking business are not new (Markham, 2015; Kerr, 2014). For instance, the U.S. experienced the harsh consequences of unethical banking practices at the height of the financial crisis in 2008. The public is therefore wary, and bankers have yet to redeem their reputation in the public domain. Against this background, following the Wells Fargo scandal, most people felt let down even further. The banking system also had a lot to do with the scandal.
The nature of the financial industry in the U.S is that it is highly competitive. Thus, to keep up, the financial industry offers higher than average compensation when compared to other industries and sectors in the economy (Brown & Worthington, 2017). Over the years, the financial industry has become a cutthroat world which is characterized by the use of high-risk reward policies. For instance, institutions are now large multinational juggernauts that offer high compensation packages and even higher reward-based incentives ( Lawler & Jenkins. 1992) . Bonuses in the financial industry in the Western world are amongst the highest in the world even when compared to other sectors of the economy. Bonus compensations in many cases can even be multiple times the annual salary of many bankers. A notable unintended repercussion is that a ‘win at all costs' mentality has been created with the end often justifies the means (Markham, 2015). The financial crisis of 2008 exposed some of the malpractices of banking sector workers much to the chagrin of the public. As a result, the American citizenry was exposed to the consequences of irresponsible banking practices. This exemplifies one of the many examples of reward systems unintentionally creating a culture that favors a few individuals while negatively affecting the majority (Kerr, 2014). Many people have a negative view of bankers in the world today. This is especially due to the existence of reward systems that seem to promote a pervasive culture of unethical financial conduct.
Many financial institutions learned that attaching personal benefit directly to their sales targets meant that employees were incentivized to work harder in a bid to achieve the firms' goals because they had a lot to gain as well (Markham, 2015). Thus, with time, reward systems have become structures that honor the end, sometimes at the expense of the means (Kerr, 2014). This reality has become real within the banking industry on more than one occasion.
The Wells Fargo Scandal
The core of Wells Fargo's operating strategy is its extensive retail distribution network, which operates from the Community Banks Division. It consists of physical branches (called ‘stores’) and alternative delivery channels, ATMs and the Internet (Bhatt, 2014). The objective of this strategy is to generate new relationships with customers and expand, to the greatest extent possible, the quantity of products and services sold to existing customers. The scale of the system has grown by acquisition. Although the bank's management has grown, it is well trained in the bank's management philosophy and the use of the bank's systems.
The financial success of Wells Fargo has been reinforced by a decentralized organizational structure and has improved the status and authority of the bank, which was the main driver of the bank's earnings (Bhatt, 2014). The decentralized model also influences the design and execution of the company's control functions. Many of the centralized functions of the bank have parallel lines in the business lines, with dual reporting lines. For example, each line of business has been informed to the head of the business line and has a secondary line (dotted line) that informs the head of Corporate Risk, the Director of Risks. There is also a similar decentralized structure for human resources (Verschoor, 2016).
The decentralized structure of the Community Bank, and the management of all levels, was ruthless and relentless in the pursuit of these objectives (Verschoor, 2017). The Community Bank's leadership recognizes the improbability of reaching these objectives, by referring to them in 50/50 plans, which means that they could only fulfill them. However, at each level of the hierarchy, their performance was measured in relation to these objectives. Employees were classified against each other in terms of their performance in relation to the objectives, and their incentive and compensation opportunities have been determined. In some cases, the employees were fired for not meeting the sales targets ( Egan , 2016; Verschoor, 2017; Verschoor, 2016). The rotation in the Community Bank was relative to that of the peers, but due to the culture, the management considered this rotation of non-banking retailers and therefore made it acceptable.
In 2002, the Community Bank, noting a rebound in violations of sales practices, established a sales integrity workgroup that led to additional employee training and modification of incentives to reduce the promotion of misbehavior. In the summer of 2002, Wells Fargo internal investigations in the United States found out that debit cards would be issued to clients without the client's consent (Sovern, 2017). Subsequently, in 2004, the Wells Fargo Internal Research Group drafted a memorandum to increase sales from 63 in 2000 to 680 in 2004. The memo noted a similar increase in completions, from 21 in 2000 to 223 projected in 2004. Beginning in 2005, the Audit and Review Committee of the company’s Board of Directors had begun to inform the Internal Audit and Security Reports that the majority of internal ethics complaints were related to infractions. In 2010, the Office of the Comptroller of the Currency (OCC), Wells Fargo's principal regulator issued a Matter Requiring Attention (MRA). This MRA was addressed to the management of the company and not to the board. Also in 2010, the OCC examiners asked the head of the Community Bank about the 700 cases of whistleblower complaints related to the employee incentive scheme game. The head of the Community Bank responded to the fact that the main reason for this complaint was a strong internal culture that encouraged valid complaints.
In 2011, Wells Fargo terminated 13 bankers and ATMs in California for participating in the handling of ATM reference credits. Despite these warning signs, the incentive compensation structure within the Community Bank remained virtually unchanged. For instance, it continued to align performance management and recognition with sales. Wells Fargo's sales practices became a public issue in December 2013. This was when the Los Angeles Times published a report that Wells Fargo customers in the area reported receiving account statements they did not know (Verschoor, 2016). Worse still, some of these statements of account had estimated the fees for activities in which the recipients of the state had not engaged. Injured customers complained to Wells Fargo and, by receiving little or nothing, proceeded to the state attorney general, the local district attorney as well as the bank's regulators.
After the LA Times report, the chair of the board's Risk Committee was instructed by Wells Fargo's Chief Risk Officer (CRO) to lead the risk management process. Sales practices and the cross-selling strategy were identified in the Executive Committee, but little reference was made to them in the Executive Summary, considering that the summary covers the most significant enterprise risks. Within the same period, the HR director, as well as the CRO, presented reports to the Human Resources Committee of the board claiming that measures had been put in place to resolve the issue. Subsequently, they reckoned that further monitoring of sales practices was required. Interestingly, they also cited that they did not find it necessary to adjust their compensation for the 2013 sales cycle.
The Scandal
The Los Angeles City Attorney, in May of 2015, filed a lawsuit against Wells Fargo. This was based on the Bank's allegedly abusive and fraudulent sales practices. After the lawsuit was filed, the chair of the Risk Committee asked for a presentation on the issues covered in the lawsuit as well as the sales practices at Wells Fargo in a broader context (Sovern, 2017). An early version of the presentation was never handed over to the Committee. This followed the questioning of the validity of the numbers by the Community Bank's management. Also, it was not incorporated in the last presentation to the Risk Committee. Further, a Risk Committee meeting in May 2005, the Community Bank's head cited that about 230 employees had been terminated owing to sales-related issues between 2013 and 2014. The dismissal of up to 70% of these employees was owed to their intentional faking of phone numbers. The other 30% were dismissed for illegally funding unauthorized customer accounts using authorized accounts (Verschoor, 2017). The Risk Committee considered the 230 number to be high. The head of Wells Fargo's Internal Investigations Division, who reported to the head of Corporate Security, had 2,500 sales employee terminations in 2013 and 2014. These figures were aggressively pushed back by the head of Community bank as well as its CRO. A detailed review of Wells Fargo's sales practices was carried out later. A third-party consulting firm also examined the company's compensation, training, and sales practices. The consulting firm's review findings were presented to the board in October 2015. During this sitting, the board of directors of the Community Bank sought to address the issues of business, and challenges of corporate governance. Further, the board approved the appointment of a firm responsible for the analysis of customer behavior (Verschoor, 2016).
The results of the review exposed the inefficiencies in the firm. For instance, many employees complained about how they had to sell many products that customers did not need for them to simply retain their positions and receive bonuses ( Arnold, 2016) . Likewise, employees in many branches reported that they endured high stress environments with many suffering psychologically ( Kingson & Cowley, 2017; Egan, 2016; Kieler, 2014) . This was as a result of having to endure a toxic work environment that forced them to employ practices that many of them found to be unethical and unfair to their clients and personal wellbeing as workers ( Kingson & Cowley, 2017; Verschoor, 2017; Arnold, 2016; Egan, 2016; Kieler, 2014 ).
The Chairman of the Board of Directors and Chief Ethics Officer provided the report to the A & E Committee, which was delivered in May 2016. The report indicated that 1,327 Community Bank employees in 2014, and 960 in 2015 were terminated for sales integrity violations. On the conclusion of the COO's Review of the Community's Heads of Bank Performance, the board issued a resolution in July, which immediately removed its position and announced it would withdraw as of December 31, 2016.
In September 2016, Wells Fargo settled with the City of Los Angeles, the OCC, and the Consumer Financial Protection Bureau. For the first time, directors learned that approximately 5,300 Wells Fargo employees had been terminated between January 1, 2011, and March 7, 2016, due to sales practice fees for unauthorized accounts. The settlement required that, among other things, that Wells Fargo pay $185 million in penalties (Verschoor, 2017). The findings contained within the settlement significantly outraged the public. As the flow of the damaging information increased, Wells Fargo was faced with numerous adverse publicity and legal actions. Ultimately, the firm’s CEO was called to testify before Congress, where he downplayed the severity of the problem by repeatedly arguing that the 5,300 terminated employees represent only 1% of the Bank's workforce. Shortly after his Congressional testimony, he resigned at the behest of the board. The COO, a longtime employee Wells Fargo, was promoted to the position of new CEO (Verschoor, 2017). These developments point towards the likely negative recursions of organizational reward systems.
Conclusion
Many clients, workers and even members of Wells Fargo board were victims of a reward system that was based on the quantity of results while neglecting fundamental principles of the service industry such as the need to create pleasant customer experiences through diligent service. In the end, most clients were treated like numbers that were the means to an end of filling sales quotas. Despite the fact that it's easy to blame the employees, Wells Fargo's rewards system was not built to favor the clients or the employees. Rather, it was built with a bias to help the institution reach its goals whether or not this was done at the expense of the clients, who were the building blocks of the organization and were the reason Wells Fargo was founded.
References
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