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  • Writer's pictureRichard Bistrong

How Reasonable Pay Plans Morphed Into Perverse Incentives.

Updated: Apr 24, 2022

This article initially appeared on The FCPA Blog, here and is reposted with the permission from the editor and publisher.

When Wells Fargo imposed a target of eight accounts per customer on its branches, the bank created an aspirational goal. Cross-selling is a proven method of encouraging growth and maximizing upside, with little incremental expense.

But when executives made managers’ bonuses dependent on the degree to which that sales goal was being achieved, and the managers, in turn, began checking their people’s progress towards those goals twice a day, they created a pressure cooker.

Some employees lost their jobs for falling short of those goals, and others observed the termination of their peers. That’s when the ethical fabric of the organization began to fray.

Taking things a step further, management began sidelining people who complained about the pressure they felt. And when the bosses failed to shut down the bad practices they knew were occurring, the final controls were removed from a system headed towards catastrophe.

It was an outcome that was hardly imaginable when the goals were designed, approved, and articulated. And it was certainly an outcome that no one wanted — not management, employees, shareholders, or customers.

Perverse incentives can drive good people to do things that they look back on with surprise and regret, when it’s too late. But perverse incentives lurk in every major corporation, waiting to be triggered by an alignment of circumstances, like hidden land mines ready to explode, plastering the results on the top of Google news.

But when does an incentive to perform become an incentive to cheat? The answer is: the moment the incentive is put into place. There are lots of ways to achieve any goal — like production, sales, or anything else that can be captured in a pay-for-performance metric.

By design, pay incentives will generally align with the health and culture of the organization, but only up to a point. While initial results might demonstrate success, later incremental growth might start to come from maladaptive strategies that diverge from the greater organizational ethos.

When goals linked to reasonable sales growth start to “stretch” and run ahead of market realities, then cutting a corner can look like a reasonable way to get “home” in a tough quarter or pay period.

Incentives are a loud, unspoken message as to “what management really wants.” Putting them into place requires thinking about them the way doctors think about prescription medications. You can’t just consider their intended effects; you also have to consider their side effects and interactions.

And it’s not just the formal, financial rewards embodied in a commission schedule or bonus plan that motivate employees. Informal incentives such as the promise of promotion, the threat of losing one’s job, or the prospects of special recognition, are also potent drivers of behavior. Not all measures can be found in an employment contract. Incentives have to be viewed — and reviewed — holistically.

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