Wells Fargo: The Importance of Culture and the Dangers of Perverse Incentives

John Stumpf, the CEO of Wells Fargo, was grilled by senators yesterday over the company’s “pressure cooker sales culture” that led employees to create millions of unwanted or fictitious customer accounts in order to meet sales goals. Although the story is in the headlines today, the bank’s practices were first reported by the Los Angeles Times back in December 2013. Here are some excerpts from that article:

Wells Fargo & Co. is the nation’s leader in selling add-on services to its customers. The giant San Francisco bank brags in earnings reports of its prowess in “cross-selling” financial products such as checking and savings accounts, credit cards, mortgages and wealth management…But that success has come at a cost. The relentless pressure to sell has battered employee morale and led to ethical breaches, customer complaints and labor lawsuits, a Times investigation has found.

To meet quotas, employees have opened unneeded accounts for customers, ordered credit cards without customers’ permission and forged client signatures on paperwork. Some employees begged family members to open ghost accounts.

The bank expects staffers to sell at least four financial products to 80% of their customers, employees said. But top Wells Fargo executives exhort employees to shoot for the “Great 8” — an average of eight financial products per household.

“If you do not make your goal, you are severely chastised and embarrassed in front of 60-plus managers in your area by the community banking president,” the former branch manager said.

This whole fiasco at Wells Fargo should serve as a reminder to all supply chain executives that culture matters and to examine whether they’ve created any perverse incentives within their teams, as well as their outsourcing agreements.

On the topic of culture, I refer you to Supply Chain Culture Counts, a guest commentary by Ron Cain that we published in August 2014. “As supply chain CEOs, we are responsible not only for the financial success of our operations, but also for our company’s long-term sustainability,” wrote Cain. “Successful leaders understand that a company’s culture is just as important to the bottom line as warehouse technology, distribution tools and operations systems. A strong culture results in measurable improvements like increased productivity, better service quality, decreased workplace injuries and lower employee turnover.”

And for more insight on perverse incentives, check out Perverse Incentives in Outsourcing Agreements, where I highlight the research of Kate Vitasek, Mike Ledyard and Karl Manrodt on this topic, as well as how perverse incentives led Progress Rail Services (a subsidiary of Caterpillar) to conduct unnecessary or improper rail car inspections. As reported by the Wall Street Journal at the time:

Car men [workers at Progress that conduct the inspections] are under pressure to identify repair work to be done. The quickest way to do so, they said, was to smash something or to remove a bolt or other part and report it as missing.

They weren’t instructed to do that, the workers said. But they added that some managers made clear the workers would be replaced if they didn’t produce enough repair revenue.

Open a bank account a customer doesn’t want or know about, or intentionally break a part to fix or replace it — this is the type of behavior that results when your culture and incentives are centered too much on sales instead of service, too much on Me instead of We.