All sales incentives are incentives “to do bad things”

All sales incentives are incentives "to do bad things"Last week, Wells Fargo was fined $185 million for fraudulently opening new deposit and credit card accounts. Wells Fargo employees opened these accounts for customers without their knowledge.

Why would the Wells Fargo employees do that? Because their compensation incentives were tied to opening new accounts. When they couldn’t make enough legitimate sales to hit their targets, some of them cheated and opened unauthorized accounts.

As you might imagine, Wells Fargo executives are under fire. And one of their most bizarre defenses is this claim:

Chief Executive John Stumpf defended the firm and the efforts it had taken to stop the behavior, which included opening accounts for customers without permission. “There was no incentive to do bad things,” Mr. Stumpf said in an interview with The Wall Street Journal.

The incentive itself is neither good nor bad

The claim is absurd for two reasons:

  1. No reasonable person thinks Wells Fargo deliberately incentivized their employees to break the law.
  2. The sales incentive, like all sales incentives, is designed to make more sales. The incentive doesn’t care about the means or motivations for making the sale.

That’s the struggle with any sales incentive program. Not all sales are created equally. Some are totally above board. Some are in the gray area, where customers are misled or truth is withheld. And some are indefensible, where company policy is violated or the law is broken.

Why do companies have sales incentive programs? The self-evident reason is that incentive programs will drive more sales. For some reason, the sales force will deliver more sales with an incentive program than they would without an incentive program. At least that’s the conventional wisdom.

That’s not a controversial idea. The thinking is, the more you pay someone, the harder they’ll work. Now, it’s an open question whether it actually works out that way. And if increased compensation does drive more effort, another open question is how long that added effort is sustained. We’ll leave these questions aside for now, and just assume that the more we pay our sales force, the harder they’ll work.

An important issue is when we talk about “effort” or “work”, when it comes to the sales team, we’re talking about something specific: closing sales. We’re not actually measuring the effort. We’re measuring the output. We’re measuring the sales volume.

The organizational context surrounding the incentive is what matters

In a literal sense, the sales incentive is not incentivizing more effort, or less procrastination, or anything of the sort. It’s incentivizing more sales. With a proper moral compass, more sales emerge from more effort. (Effort might come in the form of building closer customer relationships, or improving product/service knowledge, or any other mechanism a salesperson can use to become more effective.) But if a salesperson has a weak moral compass, and/or if the organization has a permissive culture, then we might draw in questionable or indefensible sales.

That’s why the defense of “there was no incentive to do bad things” is ridiculous. The incentive is meant to drive more sales. The incentive is agnostic toward the type of sale. What ensures these increased sales are the “right” sales? Culture. Integrity. Oversight. Calibration.

What do I mean by calibration? Making sure the incentive is aligned with a reasonable sales volume. If you make your incentive too weak, you won’t get additional sales. If you make your incentive too strong, you’ll push people toward making shady sales. You want the Goldilocks middle here, pushing the sales force toward peak productivity while not compromising organizational integrity.

Wells Fargo has a much bigger problem than a bad incentive program

Of course no one is incentivized to violate company policy or break the law. That’s not the issue here, even though for some reason Wells Fargo CEO John Strumpf felt compelled to offer this meaningless defense.

The issue is that Wells Fargo has a corrupt culture. Or they’ve hired sales folks with little integrity. Or they have little to no oversight over their sales force, to ensure they’re driving the behavior they want. It’s a probably a mix of some or all of these.

And how did Wells Fargo respond? Unsurprisingly, by completely missing the point:

Wells Fargo executives said the bank still wants to grow sales, but decided it would no longer set targets. “We think to the extent that some team members used a sales goal as a motivation to do something that is inconsistent with our culture… [it’s] just not worth it,” Mr. Stumpf said.

It’s not the existence of the incentive that matters. What matters is almost everything else, all the stuff that surrounds the incentive. If Wells Fargo admits it doesn’t have the right culture, doesn’t exhibit robust integrity, and can’t offer the appropriate oversight…then maybe it has much, much larger problems than a crappy incentive program.

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