Paved with Good Intentions: How Employee Incentives Can Go Awry

By Mark Tarallo February 28, 2018
LIKE SAVE

SHRM has partnered with Security Management magazine to bring you relevant articles on key HR topics and strategies. 

The incentive may have seemed ordinary when Wells Fargo management first issued it. But it led to some extraordinarily negative consequences.

Wells managers imposed what was sometimes called an "Eight is Great" target for their employees: sell eight accounts per customer. This type of cross-selling, in which bank employees encourage account holders to open another account, take out a credit card, or buy other services, is a common method for companies in the banking industry to increase their revenue.

But in late 2016, according to news reports and testimony before the U.S. Congress, company representatives publicly conceded that the incentive resulted in disaster. Over a period of at least five years, Wells Fargo employees created more than 1.5 million unauthorized deposit accounts, and at least 500,000 unauthorized credit card applications.

Polluted Ecosystem

The Wells Fargo case was a clear example of a perverse incentive—an incentive that results in unintended and undesirable consequences contrary to the interests of the in­centive designers.

For HR, it's important to recognize that all incentives have the potential to turn perverse, says managerial incentive expert Marc Hodak of Farient Advisors.

"Every incentive to perform is an incentive to cheat. You can't have one without the other," he says.

In practice, the majority of incentives or performance targets in the business world do not turn perverse, despite the potential to do so. Why so with Wells Fargo?

Hodak says that a few factors came together in the Wells case, and collectively they sustained a "perverse incentive ecosystem."

"Any one of the factors individually wouldn't have resulted in the debacle [that happened]," Hodak explains.

One crucial factor, Hodak says, was an unrealistic goal. While cross-selling is common in the industry, eight accounts per customer, even as an aspirational goal, does not seem realistically achievable on a widespread scale.  

Other factors compounded this problematic goal, Hodak explains. High-level managers were offered lucrative financial rewards if their staff hit the targets, and managers' bonuses were dependent on the degree to which sales goals were achieved. By some accounts, certain Wells managers began checking their progress toward the sales goals twice a day, thus helping to create an office environment that felt like a pressure cooker.

In addition to rewards for upper management, incentives were also offered at lower levels of the organization, such as promotions and job security for sales staff who fulfilled the performance goals.

Still, in most other companies, these factors do not blow up into a catastrophic situation, because there is usually some sort of safety valve. For example, some companies have an internal system of controls that flags suspicious activity, such as an unusual surge in new account creation.

But at Wells Fargo, the situation was not checked internally and it spiraled out of control. Managers communicated to employees that there would be penalties for not reaching the goals, thereby increasing the possibility of risky behavior. And management punished some who complained.

"The safety valve got short circuited somehow," Hodak says. "The cheats were getting ahead, and the honest were afraid of getting fired."

A Variety of Perversities

Of course, the Wells Fargo sales goals are not the only type of perverse incentive. While they can take different forms, management experts say that there are a few specific types of incentive that can run into problems.

One is an undermining metric. This type of metric may fulfill a short-term goal, but it is ultimately not in the organization's long-term interest.

For example, a company that wants to become more prepared for an active shooter incident may decide to require an annual active shooter training session. Once the session is complete, company leaders then say they have fulfilled their goal.

But it is possible that the training was ineffective, so the metric has the unintended or perverse effect of convincing managers that the company is prepared, even though it is not. Instead of this metric, the company should focus on performance improvement metrics that can measure the effectiveness of the training.

Another type of perverse incentive, experts say, can come in the form of budget pressure. Company leaders may indicate to HR that proposed budget reductions will be looked favorably upon, because they will save the company money. HR may then make personnel cuts that can be covered for in the short term, which are approved by the CEO. But in the long term, they may have the unintended effect of compromising the company's long-term success.  

Some financial rewards can also become perverse incentives if they alter an employee's motivation. When performance is rewarded with financial compensation, an employee's motivation can change, so that the driving force of his or her behavior becomes the extrinsic motivator of financial reward, not an intrinsic motivation to do good work.

This can have the unintended effect of decreasing an employee's overall intrinsic motivation, which can hurt performance in other areas. And studies show that reliance on extrinsic motivators can diminish creativity, which is an important component of learning and performance.

In addition, Hodak says that a performance target is more likely to have perverse effects if it contains an all-or-nothing threshold—that is, employees get a significant reward if they hit a goal of eight accounts per customer, but get nothing if they come close, like selling seven accounts.

Avoidance Strategies

Inasmuch as no one can predict the future, no manager can guarantee that his or her company's incentives will never turn perverse. However, there are strategies for minimizing their likelihood.

Bill Wipprecht was chief security officer for Wells Fargo for 23 years, until 2010. He was not involved in the incentive situation and was long gone when it came to light; he says he remembers Wells Fargo as a great company and great place to work, albeit with the business ups-and-downs that every firm experiences for creating incentives.

"I never saw the Wells Fargo incentive as being illegal. It was unethical," he says.

Wipprecht agrees with the argument that setting an unrealistic goal was one of the key reasons why the Wells incentive turned perverse. And that can sometimes be difficult to avoid, he adds, because most managers have done this at least occasionally in their career.

He gave the common example of a manager who sits with an underachieving employee in a review and sets an even higher performance goal, even though it seems unrealistic given past performance.

"Almost every manager has set unrealistic goals and objectives, and asked that the employee meet them," he says. 

However, the pressure cooker atmosphere that can drive an incentive toward perversity can be avoided if managers self-regulate their own behavior, Wipprecht says. To illustrate, he gave the example of how a security manager deals with vendors.

"I've had managers call a vendor and beat them to a pulp for minor performance issues," he says. "It's almost abusive, and then what are you going to expect in return?"

What they might get, he adds, is a vendor who will say anything to avoid that type of abuse in the future, including unrealistic claims about the products or services being used that could lead to unintended negative consequences down the line.

Attitude checks are also useful in dealing with employees, he adds. Wipprecht re­members how, as CSO, his temp­erament set the tone of the department. When he was happy and smiling, his employees were too; on days when he came into the office in a bad mood, the department darkened.

"That was the mood for the entire office for the whole day," he says.

When the manager's darker moods strike, employees are more likely to present issues in a positive light. For example, they may pretend that their performance is higher than it really is, or they may avoid the manager altogether—even though a pressing issue needs to be discussed.

Finally, friendly competition among employees may work to increase productivity, but managers need to realize that it's unwise "to set up an overly competitive situation in an organization, rather than a teamwork environment, which is what you want to instill," Wipprecht cautions.

Along the same lines, perceived favoritism can lead to unintended consequences, because employees may get the sense that the game is rigged and they need to do something drastic to compete. "If you've got a favorite in the office, it sets a negative tone for the rest of employees," he says.

In the end, experts say that incentives can still be used in a positive fashion, but managers need to be continually mindful of where they could go wrong.

"Whenever you put [incentives] in play, you are playing with fire," Hodak says. "Fire is terribly useful, but it can also be dangerous."   

Mark Tarallo is senior editor of Security Management magazine.

This article is adapted from Security Management magazine with permission from ASIS © 2018. All rights reserved.

Was this article useful? SHRM offers thousands of tools, templates and other exclusive member benefits, including compliance updates, sample policies, HR expert advice, education discounts, a growing online member community and much more. Join/Renew Now and let SHRM help you work smarter.

LIKE SAVE

Job Finder

Find an HR Job Near You
Search Jobs
Post a Job

SPONSOR OFFERS

Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 10,000 companies

Search & Connect
temp_image