Wells Fargo has had better weeks. As the bank’s CEO, John Stumpf, spent this week under congressional scrutiny after revelations that bankers had opened secret and unauthorized credit card and deposit accounts for customers for at least five years in an effort to meet sales goals, I’m reminded of the thorniness of commission-based pay.
On a basic level, commission-based pay makes sense. If executives want sales employees to be motivated to sell, they should link the amount of sales they make directly with how they’re compensated. Simple enough, right? But after a while, as evident in the Wells Fargo case, the arrangement can quickly go off the rails.
Commission-based pay may be effective in incentivizing employees to achieve certain goals. The problem is too often the parameters of the arrangement are oriented toward the individual, not the firm.
In Wells Fargo’s case, bankers wanted to meet individual commissions targets based not on organizationwide performance but on amount of new accounts opened. After a while, a single employee figures out a way to game the system, opens a few fake accounts to meet a target, tells a colleague and the culture pervades. Soon enough, the goal becomes not helping Wells Fargo drive new business by creating fake bank accounts, but filling their own real bank accounts with commissions driven by bad behavior.
The result: Wells Fargo owes $185 million in fines and has to fire 5,300 employees (not to mention the public scrutiny the bank will have to endure for years to come).
Professional sports are another example of performance-based pay run amiss — although the practice there usually doesn’t lead to criminal accusation.
Most professional athletes are compensated generously in their base salaries, but many earn a good deal through performance-based bonuses. A baseball player, for example, might earn a certain bonus if they reach a threshold for number of innings pitched over the course of a season. Another might be rewarded extra pay if they hit a certain number of home runs.
The problem in both of these situations is the player is rewarded not on the team’s performance but their own. And in some instances, a pitcher striving to pitch a certain number of innings might not be beneficial to the team, just as a player trying to hit a home run might negatively impact both their individual performance and the team’s. For example, if a baseball player is constantly “swinging for the fences,” more often than not they’re going fail, which hurts the team.
Now I should offer this disclaimer: I’ve never been paid on an individual commission system, so my own bias is in play. Personally, I think people should be compensated based on the overall value they bring, and then trusted to follow through on that value. If a sales associate weren’t performing, not receiving commissions on personal sales goals would be the least of their worries. They might be out of a job.
Still, I think executives would be smart to rethink how commission-based pay is used in their organizations. A starting point: structure incentive-pay programs not on individual performance but on the performance of a team or group of teams within the organization. That way individuals hold each other accountable for potentially scandalous practices like those in question at Wells Fargo, and the goals the commissions are based on are more aligned with those of the unit rather than the individuals within it.
Critics of this approach might argue that linking performance-based bonuses to the team instead of the individual favors average contributors. Whereas high-performing employees are more motivated to perform to increase their own payday under an individual commission-based system, they might be less motivated if they’re just going to receive the same commission as their lower-performing peers.
This is a fair critique. However, if a company is recruiting sales people that are naturally team-oriented and share the firm’s broader mission of reaching organizational goals, this shouldn’t be too big of a problem.
In any event, finding an alternative to individual commission-based pay appears to be gaining traction among some companies. GlaxoSmithKline, a drug company based in the U.K., rewards employees based on product knowledge and how doctors view its sales associates, instead of individual commissions.
Wells Fargo, for its part, has announced it will end its commissions for new accounts. But the damage has already been done. It would be wise for other firms to follow before their commission-based practices push them into a similar situation.
Frank Kalman is Talent Economy’s managing editor.