Sales incentives continue to be an area where Chief Compliance Officers (CCOs) and compliance professionals work refine their compliance regimes. In the 2020 Update to the Evaluation of Corporate Compliance Programs (Update), Incentives and Disciplinary Measures, the Department of Justice (DOJ) stated:
Incentive System — Has the company considered the implications of its incentives and rewards on compliance? How does the company incentivize compliance and ethical behavior? Have there been specific examples of actions taken (e.g., promotions or awards denied) as a result of compliance and ethics considerations? Who determines the compensation, including bonuses, as well as discipline and promotion of compliance personnel?
When considering how a company could use incentives to further a compliance program, and the role of HR in this process, we should also consider how incentives might lead to the converse, as they did in the now-infamous Wells Fargo fraudulent-accounts scandal. When you misalign these two concepts with a faulty sales strategy it can lead to a catastrophic failure, literally costing the company millions of dollars in fines, loss of business, and depreciation of shareholder value.
The sales incentives under which Wells Fargo came to such grief is a simple, and even benign, story of the cross-selling of products. After all, large banks cross-sell their clients all the time, and nobody seems to blink an eye at the cross-selling McDonalds engages in every time you buy a Big Mac when the representative asks if you would like fries with it. Yet there are other reasons for engaging in this type of business practice. Each and every time a company has a touchpoint, particularly a commercial touchpoint, with a business, it strengthens the relationship.
At Wells Fargo, however, what started off as a legitimate, legal and beneficial business strategy became not only high-risk, but illegal because of the manner in which Wells Fargo administered its approach to cross-selling. As with any sales initiative, if a company wants to push cross-selling, it will set up incentives for encouraging the sales team to engage in such behavior. This can be done by increasing commissions around the service or product being emphasized, such as the bank’s products. Companies can also increase sales by making clear that you will be evaluated on how much you sell a product or service. In other words, whether you receive a bonus, pay raise or even keep your job will be evaluated, in some part, on how much you cross-sell.
You can even have a hybrid of the above, which may be the worst of all worlds. At Wells Fargo, employees were evaluated for continuing employment by supervisors on cross-selling. Yet the employees did not receive the same financial incentives as the supervisors to make such cross-selling. Branch managers and supervisors could receive bonuses of up to $10,000 per month for meeting cross-selling quotas, whereas employees who hit their monthly quotas received, in addition to continued employment, $25 gift cards.
What about variable compensation? That is compensation based on alterable factors such as total sales, sales relative to a region, product line or other group. Some of the questions you might ask are: What does your bonus program consist of? Is it corporate performance based? Is it group performance based? Personal as in “eat what you kill”? Or is it some combination of all of the above?
A variable system can also lead to ethics and compliance failures. One reason could be similar to Wells Fargo—very high goals but no direction for employees on how to get there, coupled with a lack of communication between management and line employees, meaning there was raw fear from employees to inform their immediate supervisor of bad news. Conversely, it could be the supervisors who do not want to hear such bad news—for example, if your company has singular focus on numbers, meaning that is the single judge of your worth as an employee. Answering some of these questions if they arise can help you to understand the design of incentive plans and allow monitoring of incentive plans to identify underlying links that may arise through compliance violations.
Whatever your incentive structure, there will be employees who try to game the system. Some will do it with the tacit or explicit approval of management. You, as the CCO, may be required to act.
