Wells Fargo’s Current Compensation Mechanism

Wells Fargo’s Current Compensation Mechanism

and Lessons Going Forward

Summary:  After studying into the fraud of Wells Fargo broke out this September, we found that misleading compensation plans for C-level executives and mid to low-level employees and distorted goal in the annual reports related to cross sales ratio are among the main reasons for the misconducts for Wells Fargo employees. We also propose to think about three key questions when designing the compensation plan going forward. 

1. Current Compensation for C-levels and the Misleading Effect

For the C-level executives, the compensation plan is primarily based on the stocks and options that directly associated with the share prices of Wells Fargo. Therefore, they have high motivation to push the stock price higher by higher operational numbers, such as cross-sales ratio, also known as the average banking products one customer/household owns.

Almost all Wells Fargo executives such as CEO John Stumpf, CFO and the head of retail banking have compensation plan highly related to stocks and options.

[pic 1]

Exhibition 1: Compensation for John Stump, CEO of Wells Fargo when exits, Source: Equilar

As we can see above, a large percentage of Stumpf’s compensation of the year when he exits the firm is based on the stock performance of the company, as large as 60%, which comprises 1.6 million shares equals to 74 million euros as of September 16, 2016. According to the regulation by the bank, he is allowed to cash out the stocks as soon as he exits Wells Fargo.

 The story is same with the head of retail banking of the company, who also have a significant stake of compensation based on stocks and options. According to Wells Fargo’s 2015 proxy statement, the company said that: “its compensation committee had authorized Tolstedt’s $7.3 million stock and cash bonus in 2015, because under her leadership, Community Banking achieved a number of strategic objectives, including continued strong cross-sell ratios, record deposit levels, and continued success of mobile banking initiatives.”1 Ironically, it is exact the same year when the bank got sued by L.A. City Attorney’s office since the retail bankers encourage customers to open too many redundant bank accounts.

Exhibition 2: Compensation for former consumer banking chief Carrie Tolstedt of Wells Fargo when exits, Source: Fortune

The other C-level management shared similar compensation model, therefore, in summary, management has the inclination to burst the cross sales for their own good even that may encourage misconducts and deteriorate the company’s reputation.

1. Current Compensation for Mid to Low-Level Employee and the Misleading Effect

Sales-Based Incentives are one of the causes for the misdoing of the branch managers at 6,300 branch offices, about 10 percent of the 5,300 employees.

The sales-based compensation has a long history in the bank. Across the banking industry, Wells Fargo is known for its cross-selling, and the bank even has its catchphrase for that: “Eight is great.” It is encouraging the retail banker to sell eight products to one household in the optimal situation. Ironically, the emphasis on the cross sales ratio regardless of customer’s demand has led to the wrong place. According to a report released by Wells Fargo earlier this year, Wells Fargo reveals an average of 6.27 products per household, which has not been published by any of the other banks.

In the recent years, the Wells Fargo cross sales rate is going up by an astonishing amount and bringing the selling pressure in the retail branches to a new height, which expedites the employee’s wrongdoings.

[pic 2]

 Exhibition 3: Compensation for John Stump, CEO of Wells Fargo when exits, Source: Equilar

1. Distorted Goals In the Annual Reports Related to Cross Sales Ratio

The deceptive company targets and the compensation plan based on sales-related goals lead to the pressure cooker atmosphere and the frauds after that.

When we step back from the compensation plan and thinking hard to question the cause, one of the reason is the misleading company goals related to cross sales ratio, and surprisingly it is highlighted in fast every year’s annual report We can look at the company goals listed in the several annual reports and gain a sense of the Wells Fargo’s emphasis on the cross-sales numbers.