Millions of fake customer accounts. 5,300 rank-and-file employees terminated. $190M in federal regulatory fines. Fraudulent behavior apparently dating back years. The recent headlines about Wells Fargo have been scathing. Even without the full details, it seems obvious quite a few infractions were committed by the sales organization and leadership team at Wells Fargo. In the pursuit to find blame, fingers seem squarely and subjectively pointed at the sales compensation program, whether fair or not. What is objectively clear is that companies are concerned, as questions about sales compensation plan risks and requests for risk assessments have taken a pronounced spike. Our clients have been asking Better Sales Comp Consultants for our perspectives, and we have identified four important lessons relating to the fiasco at Wells Fargo.
1. Plan Designs – seek balance and follow best practices
Plan designs themselves are not usually the primary cause of plan risks, whether in terms of unexpected compensation costs or the likelihood of unethical behavior. However, one symptom of poor plan designs is often a desperate and frustrated sales environment. One particularly relevant topic in this situation concerns inadequate base pay with overly aggressive pay mixes.
In talking to contacts familiar with the Wells Fargo sales comp plans, there was very little base pay and very aggressive pay mixes. If all or most of pay is being delivered in variable pay, the sales energy and urgency can move from healthy and energetic to desperate and dangerous. A very aggressive pay mix particularly with low overall pay levels means results don’t just cause tension or belt-tightening but can compromise one’s ability to put food on the table and a roof over one’s head. Salespeople should be motivated and hungry rather than starved and reckless if sales results don’t break well in any given day, week, or even month. A reasonable pay mix in alignment with best practices can help create the right balance.
Plan measures are also a relevant topic area, as the “Great Eight” cross-selling metric has been repeatedly cited as a driver of this situation at Wells Fargo. First, the goal of eight, allegedly selected because it rhymed with great, seems whimsical at best; we hope that’s more an urban legend than a true goal-setting methodology. But the cross-selling objective isn’t necessarily a wrong or illicit one. Companies often want to drive strategic sales and increase the penetration from certain products. The real issue here is the opportunity to cheat that seemed to exist in this high transaction B2C sales environment and that such behavior was seemingly condoned, which we’ll explore later. But don’t necessarily blame the cross-selling measure itself for the events at Wells Fargo, as product penetration and growth strategies can be strategically effective and do not inherently inflate risk.
BSC Advice – offer a reasonable fixed portion of pay and include sales personnel in a performance management program. Create the right foundational environment while offering exciting and optimistic variable incentives that will foster a healthy sales culture with positive sales energy.
2. Goal Setting – get real about unrealistic stretch goals
Few supporting programs can create more desperation than overly aggressive goal setting. If goals appear unattainable, even with hard work and high performance, then one shouldn’t be surprised if cheating becomes a “go to” move. Some misguided sales leaders say that the best way to increase performance is to increase quotas, while most folks know there is more to this story. A better expression perhaps is the best way to increase cheating, demoralize salespeople, and eventually create turnover is to stretch quotas excessively. We’ve observed overly-hedged quotas becoming more prevalent and more pronounced during the tepid recovery after the 2008 collapse. A recent BSC/WorldatWork quota study suggests about half of companies over-allocate quotas and the most ideal range is only 5-10% down to the frontline salespeople; that amount seems like a fair hedge and allows for some flexibility in making deployment and account decisions. Anything more will likely lead to fewer than 50% of reps achieving goal, a sales culture of losing, and a much higher likelihood of risky behavior.
In the case of Wells Fargo, it appeared that not only were goals stretched but over-zealous sales managers would over-emphasize goals and results as often as every two hours. One can easily imagine a dark and anxiety-laden environment, more like a boiler room than a sales office meant to optimize customer interactions and drive related sales outcomes. It’s an outdated model, prone to risky behavior. Further, this approach likely falls extremely flat with coveted Millennials or really anyone who understands the two-sided coin of sales and service.
BSC Advice – use quota over-allocation thoughtfully. Attempt to limit total hedge to no more than 5-10%. Stay focused on a positive performance culture and avoid the boiler room drama.
3. Corporate Governance and Oversight – mitigate risk and protect your business
With all the negative attention on the financial services sector from 2008 and other times, it’s both easy and hard to imagine this kind of fraudulent activity would pop up once again at a bank. Skeptics may say it’s in the industry’s DNA, and one would think lessons should be learned from prior misconduct. Some may feel that pushing past the envelope will again pass with few repercussions. The depth and breadth of the Wells Fargo fraud is clearly not just a frontline sales rep issue. Management likely had to encourage it or at least have been willing to look the other way.
Companies should ensure the right governance rules and oversight processes exist. Define who is responsible for what, and hold them accountable. I’ve had clients with audit groups who sampled and reviewed plan payouts and deal details to ensure appropriate conduct and ethical behavior, not just to do the right thing but to minimize corporate and shareholder risk. At Wells Fargo, it’s hard to believe the fallout from years of fraudulent accounts and burned customers didn’t escalate to someone somewhere, but there should have been a person or group looking for abuse and mitigating risk. As a consultant, I’ve joined my project sponsors for interactions with internal audit groups. While they haven’t always seemed necessary, I’ll look at them in a much different light now. Wells Fargo’s fraudulent behavior should alter perspectives and will likely cast a longer shadow than some currently anticipate.
BSC Advice – take corporate governance seriously, as not just “the right thing to do” but for the health of your business. Invest in appropriate audit resources to support that mission.
4. Zero Tolerance Policy – foster ethical behavior as a mission critical activity
Companies should have a zero tolerance possible for unethical behavior. This should apply to all levels. Ethics should be part of the dialogue around all business behavior… yes, even in the rough and tumble world of sales. It should be pillar of a company’s mission statement.
There were rumors about Wells Fargo whistle blowers receiving the kind of treatment one should least encourage – ignored, shunned, and at worst, terminated. Leadership needs to create the right culture, and it should trickle down to every level. The ideal outcome is a culture of both high ethics and high performance from an elite organization.
BSC Advice – focus on ethical behavior in your mission statement, in leadership communications, and as part of your performance management culture.
In conclusion, sales compensation plans and programs can be a great way to align salespeople and company results, excite sellers, and drive optimal performance. It’s easy to point blame at the plan design or even goal setting at Wells Fargo, and those elements should be carefully considered. But one should raise the focus up a notch. Focus on the leaders, the messages being sent, and the corporate culture that enabled this situation. Hopefully, with the right controls, a culture of ethical performance, and both appropriate plan designs and goal-setting methodologies, other companies can learn from the many lessons of the Wells Fargo crisis.