The ripple effects from the Wells Fargo sales abuse scandal may turn out to be smaller than bankers had initially feared.
Banks large and small have been waiting anxiously to see how much regulators' expectations are going to change in the wake of the Wells scandal. The fear was that the San Francisco bank, on a short leash with its regulators, would eliminate performance-based pay, putting pressure on other banks to follow suit.
Wells Fargo is keeping many details under wraps, but the revised scheme appears to bring the $1.9 trillion-asset company into closer alignment with the rest of the sector, consultants said. Notably, the new plan does not get rid of incentive pay, which has long been a staple of compensation plans throughout the retail banking industry.
"I think the construct was not that radical, and I'm happy that it wasn't," said Darryl Demos, an executive vice president at Novantas. "They could have easily overreacted."
In September, shortly after Wells was penalized for a fraud scheme in which employees opened as many as 2 million phony bank and credit card accounts, the Office of the Comptroller of the Currency announced a review of sales practices at all of the large and midsize banks it supervises. The OCC apparently did not object to Wells Fargo's new compensation plan, which should ease the industry's fears of a major shift in regulatory expectations. A Wells spokesperson said that the bank's plan will be subject to ongoing regulatory review.
Below are three other takeaways about Wells Fargo's new pay scheme.
The plan should make employee misconduct less common and easier to detect.
The new plan eliminates sales quotas, which were blamed for creating a pressure-cooker environment in which widespread sales abuses took place. It also leans more heavily on salary, as opposed to performance-based bonuses. The company said that for tellers, base pay will comprise more than 95% of all compensation.
In addition, the revised scheme places greater emphasis on the performance of an entire branch, as opposed to individual employees. For entry-level bankers, incentive pay will be based entirely on team performance, the company said. For most other positions, the majority of the opportunity for incentive pay will be based on team performance.
Those changes reduce the incentive for employees to cheat.
"As a rule, team measures are much less of a risk for those kinds of bad behaviors," said Mark Blessington, a sales and marketing consultant in Asheville, N.C.
Wells also said that it will be doing more proactive monitoring to ferret out bad behavior, including new oversight at the regional and corporate levels. These steps should protect against the possibility that branch-level employees will get away with breaking the rules because their managers are looking the other way.
Wells is trying hard to hold onto its top-performing employees.
Given the reputational damage caused by the four-month-old scandal, Wells Fargo already had an employee morale problem.
Now the tilt toward a heavier reliance on base pay could mean a pay cut for those retail bankers who account for an outsized share of the company's sales. So retail banking chief Mary Mack has another reason to worry about her most productive employees looking for new jobs.
Wells did not release enough information to determine how big the pay cuts could be, but Wells Fargo Chief Financial Officer John Shrewsberry said in an interview Friday said that Mack was cognizant of employee retention as she was designing the new pay plan.
"Mary believes that she's got the tools to retain the highest-performing people," Shrewsberry said in an interview Friday. "She thinks that she's captured the ability to reward, attract and retain the best talent."
Wells spokeswoman Mary Eshet said that the company's new compensation plan limits the amount of incentive pay that can be earned in most retail banking positions. But she also maintained that the plans provide competitive earning opportunities.
The jury is out on some of the new metrics that Wells will use to calculate incentive pay.
Under its old pay plan, Wells provided a sales credit to its retail banking employees regardless of whether the customer ever used the product. That formula gave employees an incentive to open unauthorized accounts that might never be used.
The revised plan bases incentive pay partly on how much a customer uses Wells Fargo products. It also looks at whether customer balances are growing over time.
"It's not about how many accounts have you opened, how many new products or solutions have you sold. But rather, it's about attracting new primary customer relationships to the bank," Shrewsberry said.
Those changes drew mixed reviews from outside observers.
Demos, the Novantas consultant, said that it makes sense to emphasize customers' product use, as opposed to just sales, in an incentive pay formula. "This one approach, if they'd put that in place, might have kept them out of hot water," he said.
But Jay Freeman, a former Wells executive who was involved in formulating incentive pay at the company, expressed skepticism about basing a branch employee's incentive pay on how frequently customers use products, or whether their account balances grow over time.
"I'm not sure exactly what a branch employee does to impact this metric," Freeman said in an email. "Wells needs to be clear what it is they are asking people to do or they will get random activities and behavior across the branches as individuals try to sort this question out for themselves."