Stanford Report Gives Greater Insight into the Link Between Incentives, Risk and Compensation at Wel

Executive Pay Plan Design

As the impact of the Wells Fargo cross-selling scandal continues to reverberate inside companies and among outside observers, a new report from the Stanford Corporate Governance Institute delves into the company's statements on culture and the informal messages communicated through its incentive plans.  The report references a Deloitte survey that finds 94 percent of executives believe that workplace culture is important to the success of the business and 62 percent believe "clearly defined and communicated core values and beliefs are important."  However, as was observed in the Wells Fargo situation, "incentives can work in opposition to culture, particularly when they reward employees for achieving a metric without regard to the actions they took to achieve that metric."  The report recounts the importance that values and culture played at Wells Fargo and quotes many of the statements made by senior executives and messages communicated to employees.  It also recounts how the company's handling of the congressional hearings changed the narrative on the scandal and amplified the significantly negative effect on its reputation, with the Wall Street Journal reporting a significant reduction in new customer checking accounts.  In light of the outcome, the report raises several questions, including whether the disconnect between incentive plans for branch-level employees and senior executives contributed to a failure to recognize the problem earlier, or whether the real issue was failure to adequately monitor and respond to internal reports of violations of company policies.  It also questions whether the mix of incentives sufficiently reinforced the company's culture and minimized contradictory employee actions.