In 2011, Wells Fargo was forced to pay $85 million in fines for selling higher interest rate mortgages to customers who should have qualified for lower rates, and falsifying loan applications in the process.
Not five years later, Well Fargo finds itself faced with a strikingly similar scandal. Last Thursday the bank announced that it reached an agreement with the Consumer Financial Protection Bureau (CFPB) to the tune of $185 million in fines for opening deposit accounts and transferring funds without customers’ consent. This settlement started a landslide of commentary, calls for deeper investigations, increased regulation of the banking industry and questions around how such unethical behavior might become the norm of acceptable behavior across an entire organization.
As Levi Nieminen, Director of Research at Denison Consulting put it in a recent LinkedIn article, “the formula of disaster might have been as simple as this: Open a new account. Move a small amount of money in. Close the account and put it back. Repeat. Get a bonus.”
It sounds simple. So simple, in fact, that it’s easy to picture a small, tightly-knit group of unethical employees high-fiving over cubicle walls as they “hacked” a system that has been known to aggressively promote cross-selling as a key pillar of its operational strategy.
Unfortunately, as news of the fallout continues, it’s clear that Wells Fargo is realizing a much more complicated and systemic culture issue. It wasn’t limited to small group of employees but spread across thousands of people. Over the last several years, Wells Fargo terminated a whopping 5,300 employees who were found to be connected to the scandal.
It Gets Worse
Earlier this year, Carrie Tolstedt, the Wells Fargo executive in charge of the unit that’s now at the epicenter of this current scandal, announced that she was exiting the company. And at the July announcement of her exit, Wells Fargo’s CEO John Stumpf praised Tolstedt as “a standard-bearer of our culture” and “a champion for our customers.”
Of course, we now have a much different picture of Carrie Tolstedt, who will be walking away from the bank later this year with $124.6 million in stock, options, and restricted Wells Fargo shares, not to mention the $7.3 million bonus she received last year. But this is beside the point.
In many ways, some might argue that this was a time bomb waiting to explode. In 2013, just two years after that first scandal in 2011, an article in the L.A. Times shed some light on Wells Fargo’s pressure-cooker sales culture. In this article, one former Wells Fargo employee shared that managers actively coached workers on how to inflate sales numbers. Another reportedly discovered that employees talked a homeless woman into opening a total of six checking and savings accounts.
Publicly, Wells Fargo officials have espoused the value that they place on ethical conduct. It seems that, in reality, employees were regularly expected to force “unneeded and unwanted” products on customers to satisfy sales goals.
I’ve had the good fortune to work with many clients in my career. I’ve had the opportunity to interact with thousands of employees, leaders and customers working to understand the cultures that exist in their organizations, and how those cultures drive behavior.
In every instance, the systems and processes that are in place become tangible mechanisms for showing people what is truly valued and to reward (or punish) certain behaviors. Compensation is one such process that subtly (or not so subtly) informs people as to what’s truly valued. And, at its core, this isn’t necessarily a bad thing.
Unfortunately, as variable compensation plans afford high-performers an opportunity to maximize their income, they can also come with many unintended consequences. From lawyers who paid their client billables, to the product sales reps who work in cahoots with buyers to shift the timing of purchases to help each hit their bonuses, these compensation models can be a driving force for behavior if not designed with extreme care.
It’s clear from this story that compensation models can make an organization’s core values pretty much meaningless, if not laughable.
When push comes to shove, employees will learn to stack the deck in their favor in order to maximize their personal gain. If processes are broken, they find workarounds to help them accomplish their sales goals despite the existing rules and constraints. But there are a couple of huge differences between learning how to navigate the system and what seems to have happened at Wells Fargo.
First, the overwhelming majority of people learn to “hack the system” within the ethical boundaries and rules of their bonus plans. Second, when people do leap from working within the system to behaving unethically, it is often limited to a small number of folks. In this situation, leaders at Wells Fargo, who were each highly compensated themselves for hitting performance targets, seemed to actively create a set of norms of behavior. These norms not only accepted unethical behavior but may have even found ways to coach and reinforce it.
It wouldn’t be surprising if people within Wells Fargo even began to rationalize their collective behavior over time in order to further reinforce that what they were doing was the right thing to do.
In a society that has evolved to be highly individualistic and in a work environment that rewards short-term results over the long-term performance, what should we expect? The average American hourly wage has stayed stagnant at best for the past 3 decades, and many people find themselves in a position where variable bonuses are not an extra reward, but necessary to support their lifestyle. When those bonuses are threatened, is it all that surprising that some people will find ways to do anything in their power to succeed?
This week, CEO John Stumpf has publicly blamed bad employees—not leadership—for these behaviors. “The 1% that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do,” he said. “That’s a false narrative.” At the same time, the bank announced that it would eliminate product sales goals by 2017 in an effort to begin to change the way they incentivize employee behavior.
It’s an undeniable fact is that the culture of an organization has a profound effect on shaping the behavior of its members. And as we’ve seen over the past two weeks with Wells Fargo, ignoring this reality can be disastrous.
Wells Fargo is at a crossroads. With a market cap of $236.9 billion, $185 million only represents only about 3% of the bank’s second-quarter profits. The financial cost may be pocket change, but the bank has also lost the trust of its stakeholders. It remains to be seen how deeply they will dig into their culture to make the changes needed to win back that trust.
This article originally appeared on Forbes and is based on information that has been reported in the public domain.
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