The Wells Fargo scandal over unauthorized accounts is prompting many board members and executives to wonder if their companies are at risk for such an unfortunate event. Board members and executives should have such concerns. However, they should also ensure that the company doesn’t overreact and dilute an incentive compensation framework that seeks to encourage growth. For many businesses, growth comes from a combination of more customers and increased “share of relationship.” It is in pursuit of this latter aspect of growth that Wells Fargo got into trouble.
If your company has a similar metric in the incentive framework, should you abandon it? Not necessarily. There are things your company can do to maintain a focus on “share of relationship” while being responsible and responsive to the Wells Fargo scandal:
1. Percentage of award tied to “share of relationship” – Generally speaking, if your metric is 20 percent or less in an incentive plan scorecard, it is unlikely to draw excessive focus, especially if the other 80 or more percent provides an effective counterbalance of performance focus. You might want to ensure that overall customer satisfaction is also in the scorecard at the same or higher weighting. If they are the same (e.g., 15 percent each) you might consider a nominal shift so that customer satisfaction is given additional weight at the expense of share of relationship (e.g., 20 percent and 10 percent, respectively).
2. Annual risk review and overall risk management – Review of the risk of adverse actions is, of course, already a part of the risk review. But it wouldn’t hurt to review your risk review process and see if there are places where it can be enhanced. The certification of metric results might require enhanced positive proof of customer intent with respect to new products/accounts/policies. Random audits of customer relationships might also be appropriate.
3. Clawback – Make it explicit in your company’s policy that events resulting in a material adverse impact on company reputation are grounds for clawback of incentive pay. While such language may call for subjective evaluation, that seems manageable and worth the enhancement. Such a provision goes beyond Dodd-Frank requirements, but that could change by the time Congress is done investigating this scandal.
4. Reliance on discretionary adjustments to incentive calculations – It is a good practice to review annually a list of unusual events that might trigger discretionary adjustment to incentive formulas. Explicitly including things like reputational damage and evidence of questionable practices is a great idea.
5. Leadership/values – Ultimately, company leadership must make clear that the trust and confidence of customers is paramount, and that unethical behavior is subject to zero tolerance. Likely, this is assumed at your company. But it doesn’t hurt to look for opportunities to reinforce the message, both internally with employees and externally with other stakeholders.
In summary, companies can learn from the Wells Fargo scandal. But they can also overreact. Think carefully about the priorities of your incentive compensation plans, and consider a broader set of responses before scrapping a key metric.
