Gaming Incentives Is No Laughing Matter

Author: Jason Kearns, VP of Technical Services

I have a colleague who loves to quip:

“The great thing about incentives is they work; and the bad thing about incentives is… they work.”

More evidence of this phenomena has made the news recently involving Wells Fargo.  Published everywhere including the New York Times:

To summarize, Wells Fargo has a go-go sales culture that apparently emphasizes account penetration and cross selling above all else.  Personnel felt tremendous pressure to open new accounts; so much so that they resorted to illegal tactics.  These accounts range from harmless savings accounts to fee generating credit lines.  In the end, millions of accounts were created illegally and many turned out to be quite harmful to customers.  Wells Fargo is now paying to clean up this mess and it started with the termination of over 5k employees.

From the article:

“Unchecked incentives can lead to serious consumer harm, and that is what happened here,” said Richard Cordray, director of the Consumer Financial Protection Bureau.

“If the managers are saying, ‘We want growth; we don’t care how you get there,’ what do you expect those employees to do?” said Dan Amiram, an associate business professor at Columbia University.

That is a hugely embarrassing mess for a major corporation that could have been prevented rather easily.

First, incentives should ALWAYS align with corporate objectives.  Does the board really care about rote account numbers above other metrics such as average account size, gross dollars managed, etc.?  I would argue that account quantities are helpful KPIs but not core objectives.  The key question to ask on any plan is… “can an employee get paid for creating transactions that don’t create value?”  We call that gaming.

One avenue to reinforce the right behavior in your organization is to include “counterbalancing” KPIs to prevent a single-minded problematic pursuit. In this example, including customer satisfaction in addition to the growth of new accounts might have prevented one particular metric motivating your sales reps (or employees) at all costs.

Second, even if the metric you are using is a corporate objective there needs to be a way to inspect the quality of the information.  This is where Wells is getting hammered.  Clearly, regulators have found that Wells didn’t inspect and didn’t want to inspect this data.

The reality is there are data driven ways to test the quality of account growth numbers.  Sophisticated systems use business logic that hopefully reinforces the directives of management.  Of course, culture can’t be coded for and no system can force a company to do right by customers.  That needs to come from the top.  However, history has proven that even the most ardent policy enforcers can still be victimized by clever plan gaming.  The threat of termination only leads to a lot of costly terminations if the participants can get away with it for a while.  Instead, plan and compensation system designers should focus on removing the likelihood that a participant could ever benefits from cheating.  Once that goes away, they all stay good citizens and we all live happily.