Incentives Are More Complicated Than You Think

Something we’ve been thinking about

For years Wells Fargo pushed a cross-selling goal of about eight financial products per household, captured inside the bank in the slogan “Going for Gr-eight.” The number was meant to track how deeply customers were using the bank. Under steady pressure to hit it, employees opened accounts and credit cards that customers had not authorized, an estimated two million when the scandal broke in 2016 and closer to 3.5 million by later counts. In September 2016, regulators and the Los Angeles City Attorney reached a $185 million settlement, $100 million of it to the Consumer Financial Protection Bureau.

How we see it through leadership economics

The cross-sell count began as a fair measure. If a customer holds more accounts, the reasoning went, the relationship is probably deeper, so products per household was a rough measure of loyalty. The problem was that once the measure is created, employees will tend to focus on the metric at the expense of other important elements of their job. In this case, Wells Fargo employees began to ignore basic banking ethics, but there are more innocent examples of how explicit incentives can be counterproductive.

When teachers in the Washington, DC school district were offered large incentives for improving their students’ test scores, those who weren’t being observed shifted their effort toward test preparation. There are, of course, many other valuable skills teachers are expected to develop in their students, but because those skills are difficult to measure, over time they are squeezed out.

The lesson for leaders is that team members notice what behavior gets rewarded, and what is most easily observed is most likely to be rewarded. In industries with easy-to-measure output, this can be optimal. But in many contexts there are few clear measures of success, and artificially creating one is likely counterproductive.

A line we’re sitting with

A man who knows the price of everything and the value of nothing.

Oscar Wilde, “Lady Windermere’s Fan”