In 2020, Wells Fargo paid $3 billion to settle claims that employees had committed widespread consumer abuses, including opening millions of unauthorized or outright bogus accounts, forging signatures, and moving money from real accounts to fake ones.
Regulators zeroed in on Wells Fargo’s incentive system, intended to juice sales. Employees “secretly opened unauthorized accounts to hit sales targets and receive bonuses,” according to the director of the Consumer Financial Protection Bureau.
The scandal highlights how workplace incentives “can be a cure as well as a poison,” according to Tae-Youn Park, lead author on research published in the Academy of Management Annals that explores how incentive programs can unintentionally encourage bad behavior at work.
Park, director of research at Cornell University’s Institute for Compensation Studies, along with researchers from Vanderbilt University and Hongik University, examined more than 360 articles and studies examining the relationship between incentive programs and ethics across a range of industries, including health care, for-profit business and education.
Incentives are based on the controversial assumption that external rewards and punishments are the primary motivators of people’s actions. Leaders usually deploy incentives with the aim of boosting their organization’s performance, but the focus on rewards can “open you up to overlooking other important values,” Park said.
In the case of Wells Fargo, at the time of the settlement, the company’s chief executive Charles Scharf decried the conduct “and the past culture that gave rise to it” as “reprehensible and wholly inconsistent with the values on which Wells Fargo was built.”
The prevalence of workplace incentives is rooted in behaviorist theory, which was derived from work with laboratory animals, as human behavior expert Alfie Kohn wrote in the Harvard Business Review in 1993. Incentive programs - like piecework pay for factory workers, stock options for top executives and commissions for salespeople - don’t tend to produce lasting changes in people’s behavior, Kohn argued.
“Do this and you’ll get that is part of the fabric of American life,” Kohn wrote. Rewards, however, “typically undermine the very processes they are intended to enhance.”
The research reviewed by Park and his colleagues backs this up.
In health care, for example, doctors who were rewarded for achieving goals such as better patient outcomes got higher bonuses by selectively admitting healthier patients, Park said. In education, the frequency of cheating on standardized tests by teachers or administrators was higher when teachers were rewarded for classes that performed better, according to data from Chicago public schools. In for-profit business, chief financial officers were more likely to withhold negative information about their firms if their bonuses were tied to the company’s financial targets.
The consequences of incentives have a lot to do with how they’re set up, Park said. People aren’t very motivated to cheat to hit goals that are too easy or entirely out of reach. But with incentives that are challenging but achievable “people tend to focus on the goal over the value of what they’re doing,” Park said.
He pointed to a program at Sears decades ago that rewarded auto service employees for strict sales quotas. The company discontinued the commissions in 1992 after allegations came out that employees were defrauding customers, overcharging and billing for unneeded repairs.
In a news conference at the time, then-Sears Chairman Edward A. Brennan said: “It seems to me our incentive compensation programs created a wide opportunity for mistakes to be made,” according to reporting from the Los Angeles Times.
It is harder for workers to justify bad behavior if they are acting solely on their own behalf, Park said. Team-based incentives, on the other hand, can encourage members to ignore or conceal ethical lapses to avoid disrupting the group. Studies that compared employees in individual incentive systems and team-based ones consistently showed that teams are more likely to falsify data and misrepresent products to juice performance.
Systems like these can create a workplace culture that pulls employees away from their values, such as the Wells Fargo scandal, according to Christian Busch, director of the global economy program at New York University’s Center for Global Affairs.
“You create this fear among people that if you don’t do ‘x, y and z,’ then you’re out,” Busch said. “Because of this setting, [workers at Wells Fargo] didn’t have a lot of psychological safety so they didn’t feel they could push back.”
Companies often “incentivize one thing and hope for something else,” said Bill Becker, associate professor of management at Virginia Tech. And while many incentives rely on financial rewards, the reality is that “money brings out the worst in people, and it almost never brings out their best,” Becker said.
Becker worked on a study published in 2018 that found that setting compensation goals led to more examples of dishonest managers getting paid bonuses for hitting certain targets. Such behavior creates a slippery slope: Dishonesty became increasingly worse once managers had passed a certain threshold, the researchers found.
People are much more motivated by recognition and positive reinforcement than they are by short-term rewards, Becker said.
“What we really want is to be respected and valued,” Becker said. “That’s when we’re really doing our best work, but that takes great leaders who do that on a daily basis.”
Stress and pressure can also entice employees to cut corners to achieve goals, Park said. When worker are “cognitively or emotionally exhausted,” they lose their resources for self-regulation.
“When they lose those, they will just think about the short-term goals in front of them,” Park said. “Then they’re more prone to act in an unethical way.”
Lack of accountability measures can also tempt bad behavior in incentive programs. When an incentive to lie or cheat is presented without monitoring or penalty, “the likelihood of ethically questionable behaviors such as overclaiming performance increases,” according to the Academy of Management Annals research.
In one experiment at a call center, workers were told their company was cutting back on audits of their work. In reality, the company continued monitoring and found a sharp spike in workers boosting bonuses by logging fake calls.
Incentives can be useful in some contexts, Park noted, especially when organizations are explicitly trying to encourage ethical behavior, like whistleblowing.
For example, financial incentives for whistleblowers work best when workers believe that the behavior will, indeed, be recognized and rewarded, one study found. Another concluded that such incentives are especially helpful when the degree of the misconduct is lower, because people already feel stronger motivation to speak up - with or without a reward - when faced with severe ethical breaches.