Opinion: What price performance? Tying compensation to sales targets can have long-term costs

Wells Fargo was recently fined $185 million by federal regulators in the United States – the largest penalty ever imposed by the Consumer Financial Protection Bureau.

By Colleen Francis

This happened after allegations surfaced of widespread illegal sales practices in which Wells Fargo employees had opened up some two million bank accounts without the knowledge of their customers, all in an effort to meet sales targets.

But this isn’t just a Wells Fargo issue.

Much of what happened in that case forms part of a repeatable pattern, one that’s seen in too many businesses today.

It should come as no surprise to anyone that when you build a team and tie its compensation directly to just hitting sales targets, people on that team are going to perform accordingly. That old saying rings true: You really do get what you pay for.

In the case of Wells Fargo, a large faction of the team crossed the ethical line in the name of pay for performance, and in doing so, they produced the results they were paid to produce: boosting sales of products to existing customers. That came about because the company chose a bonus-pay plan solely based on results and emphasized goal attainment above all other results.

Frankly, there’s nothing wrong with paying for results; many of my clients do this successfully.

The trouble starts when results overshadow all other metrics of success. When that happens, teams naturally conclude that achieving targets at any cost is the only option.

For Wells Fargo, bonus pay was contingent on hitting targets for opening accounts and adding products. This invited both unethical and illegal behaviour within the company, because achieving sales results alone was the only way people could get their bonuses. Since managers were also rewarded based on whether their teams met sales goals, there was no appetite for oversight when sales started to increase well past previous norms. Bad management decisions propagate when no one is encouraged to seek the truth.

The situation at Wells Fargo – as outrageous as it appears – is not an isolated incident. Here are three related examples among many that can be pulled from headlines in OBJ and other business news sources on any given week.

First, there’s Volkswagen, whose executives are still digging their company out after stories surfaced that more than a half-million diesel cars it sold in the United States had been equipped with software designed expressly to cheat on emissions tests.

Why did it happen? Because VW executives wanted their company to be the No. 1 carmaker in the world, and selling more diesel cars in America was thought to be vital to achieving that goal. Engineers were told to make it happen or they would be replaced. VW nearly met its sales goal, but at a price of some $14 billion in settlements to date, jail time for some, and a steep level of self-inflicted damage to the company’s brand.

Second, there’s Samsung, which currently finds itself saddled with a near-billion-dollar recall of its newest cellphone, the Galaxy Note 7, after reports emerged that some batteries installed in this model were prone to catch fire and explode. While the company has blamed this on a manufacturing process, some industry observers have publicly stated that decision-making within Samsung was overly ambitious with the launch schedule – presumably to preempt its rival, Apple, which was poised to launch iPhone 7, its newest model, just weeks later.

Third, Canadian federal government bureaucrats are knee-deep in a scandal involving a horrifically glitch-riddled rollout of the government’s new internal pay and benefits system called Phoenix.

More than 80,000 federal employees have been affected: Some have not been paid for months, and others are being overpaid. There’s still no word on when these costly, damaging malfunctions will be ironed out.

Why wasn’t Phoenix tested more thoroughly? Indications are that project decision-makers were hasty to launch it, because their bonus pay was tied to a one-time rollout. Here’s how that got interpreted: Launch on time at any cost or you’ll be penalized. So, they launched on time. At incredible cost.

In each of these cases, people did what they were paid to do. Pay drives performance. It’s the No. 1 motivator of human behaviour in business.

Wells Fargo’s team boosted crossover sales. VW sold more cars. Samsung shipped a product ahead of its rival. And bureaucrats kept a big project on track to launch on time. And yet none of those goals mattered when the price of meeting them became apparent.

Wells Fargo didn’t build oversight into its sales strategy. The group responsible for Phoenix chose the wrong metrics. In the case of VW, they failed on both of those counts.

Pay for performance works well, but only if you are measuring the right things in alignment with what this compensation model is meant to solve.

Wells Fargo should have had performance bonuses in place around customer satisfaction. This would have ensured that unhappy customers were caught quickly and their concerns addressed fully. It would have provided an incentive to find out why “too good to be true” sales achievements were happening within the bank. Coaching would have gone a long way in diagnosing the problem, too; it would have forced the team to spell out how it was achieving its goals.

The executives responsible for the Phoenix rollout used the wrong metrics to define good performance. Pay bonuses should have been tied to a much-better definition of what constituted a successful launch. That would have encouraged greater focus on prelaunch troubleshooting, combined with a staggered rollout strategy.

At VW, executive compensation should have been based not just on growth and share price, but on service excellence and customer standards. That would have instilled more checks and balances and given people incentive to stand up and say “no” rather than accept a way of working that ultimately proved devastatingly costly to the company.

No executive in their right mind plans a growth strategy that entails the kinds of disasters that happened at Wells Fargo and elsewhere. That’s why it’s important to choose smart growth – one that’s built on an attention to the right details, to living up to good corporate values and then rewarding people accordingly.

Colleen Francis is an Ottawa-based sales consultant and owner of Engage Selling Solutions. She has worked with organizations such as Abbott, Merck, Merrill Lynch and RBC and is the author of the best-selling book, Nonstop Sales Boom.