Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Unintended consequences of employee incentive programs

The recent revelation regarding aggressive sales practices at Wells Fargo shocked the financial community and highlights some of the unintended consequences of employee incentive programs. Employers normally have the best of intentions when they roll out an incentive program. The desired result is a win-win situation in which revenues increase and employees are rewarded for their efforts. What could possibly go wrong?

dishonest, fraud, employee incentive programs, Wells Fargo

What can go wrong is exactly what employers should be asking, from inception through implementation. Focusing development efforts solely on the desired end result can have disastrous consequences, as witnessed at Wells Fargo. As of today, it is estimated that 2 million customer accounts were opened in the last four years without consent. Approximately 5,300 employees have lost their jobs, executive management is under investigation for potential securities and Sarbanes-Oxley (SOX) violations, the company was assessed a fine of $185 million dollars and the Wells Fargo brand has been irreparably damaged (*). This is about as far from a win-win result as one can get. So what happened?

When examining the fraud triangle (pressure, opportunity and rationalization), one of the major factors in the commission of fraud is pressure. One constant reported by former Wells Fargo employees is that sales goals were unrealistic and the pressure to perform was overwhelming. Employees who did not meet their goals were systematically harassed, including being forced to work non-compensated hours and threatened with termination. On the flip side, those that did meet sales goals were monetarily rewarded. These extreme punishment and reward factors combined to create extraordinary pressure to perform. It is not surprising that this level of pressure caused employees at Wells Fargo to turn to fraud in order to survive. How can you prevent the same outcome with employee incentive programs within your organization?

The first step is to ensure that the tone from the top of the organization is consistent and loud. Your employees must know that how they achieve results is just as important, if not more important, than the results themselves. This message must be consistent from all levels of management and demonstrated often. It is not enough to just provide lip service.

The second step in fraud proofing your incentive program is to set realistic goals. One way to achieve this is to use the SMART goal system. This will ensure that goals are Specific, Measurable, Assignable, Realistic and Time based. Most individuals find value in their work. They want to be an asset to the organization and help it thrive. Employers need to ensure they are providing employees with the tools to succeed, instead of throwing up road blocks. Unclear expectations, unobtainable goals and threats only serve to demotivate employees and open the door to fraud.

The third step is to conduct a thorough fraud risk assessment during the design phase of any incentive program. Individuals from all levels of the organization should be involved in this process as feedback from multiple levels is critical. In addition, some organizations may find it helpful to bring in an outside consultant to review internal controls and provide a risk assessment of the proposed program. While these additional steps may seem time consuming and costly, it is better to identify and deal with potential fraud issues prior to implementation of employee incentive programs. The alternative is not pretty as Wells Fargo has discovered.

Shyla A. Ingram, MSA

(*)   McGrath, M. (2016, September 14). Report: Federal Prosecutors Investigating Wells Fargo For Illegal Sales Tactics. Forbes. Retrieved September 21, 2016, from http://www.forbes.com/sites/maggiemcgrath/2016/09/14/report-says-federal-prosecutors-investigating-wells-fargo-for-illegal-sales-tactics