What price per­for­mance?

Ty­ing com­pen­sa­tion to hit­ting sales tar­gets is a tried-and-true strat­egy. But sales con­sul­tant Colleen Fran­cis says re­cent ex­am­ples at Volk­swa­gen, Wells Fargo and other work­places show that putting those goals above all else can have dev­as­tat­ing long-term

Ottawa Business Journal - - COMMENTARY -

Wells Fargo was re­cently fined $185 mil­lion by fed­eral reg­u­la­tors in the United States – the largest penalty ever im­posed by the Con­sumer Fi­nan­cial Pro­tec­tion Bureau. This hap­pened af­ter al­le­ga­tions sur­faced of wide­spread il­le­gal sales prac­tices in which Wells Fargo em­ploy­ees had opened up some two mil­lion bank ac­counts with­out the knowl­edge of their cus­tomers, all in an ef­fort to meet sales tar­gets. But this isn’t just a Wells Fargo is­sue. Much of what hap­pened in that case forms part of a re­peat­able pat­tern, one that’s seen in too many busi­nesses to­day.

It should come as no sur­prise to any­one that when you build a team and tie its com­pen­sa­tion di­rectly to just hit­ting sales tar­gets, peo­ple on that team are go­ing to per­form ac­cord­ingly. That old say­ing rings true: You really do get what you pay for.

In the case of Wells Fargo, a large fac­tion of the team crossed the eth­i­cal line in the name of pay for per­for­mance, and in do­ing so, they pro­duced the re­sults they were paid to pro­duce: boost­ing sales of prod­ucts to ex­ist­ing cus­tomers. That came about be­cause the com­pany chose a bonus-pay plan solely based on re­sults and em­pha­sized goal at­tain­ment above all other re­sults.

Frankly, there’s noth­ing wrong with pay­ing for re­sults; many of my clients do this successfully.

The trou­ble starts when re­sults over­shadow all other met­rics of suc­cess. When that hap­pens, teams nat­u­rally con­clude that achiev­ing tar­gets at any cost is the only op­tion.

For Wells Fargo, bonus pay was con­tin­gent on hit­ting tar­gets for open­ing ac­counts and adding prod­ucts. This in­vited both un­eth­i­cal and il­le­gal be­hav­iour within the com­pany, be­cause achiev­ing sales re­sults alone was the only way peo­ple could get their bonuses. Since man­agers were also re­warded based on whether their teams met sales goals, there was no ap­petite for over­sight when sales started to in­crease well past pre­vi­ous norms. Bad man­age­ment de­ci­sions prop­a­gate when no one is en­cour­aged to seek the truth.

The sit­u­a­tion at Wells Fargo – as out­ra­geous as it ap­pears – is not an iso­lated in­ci­dent. Here are three re­lated ex­am­ples among many that can be pulled from head­lines in OBJ and other busi­ness news sources on any given week.

First, there’s Volk­swa­gen, whose ex­ec­u­tives are still digging their com­pany out af­ter sto­ries sur­faced that more than a half-mil­lion diesel cars it sold in the United States had been equipped with soft­ware de­signed ex­pressly to cheat on emis­sions tests.

Why did it hap­pen? Be­cause VW ex­ec­u­tives wanted their com­pany to be the No. 1 car­maker in the world, and sell­ing more diesel cars in Amer­ica was thought to be vi­tal to achiev­ing that goal. Engi­neers were told to make it hap­pen or

they would be re­placed. VW nearly met its sales goal, but at a price of some $14 bil­lion in set­tle­ments to date, jail time for some, and a steep level of self-in­flicted dam­age to the com­pany’s brand.

Sec­ond, there’s Sam­sung, which cur­rently finds it­self sad­dled with a near-bil­lion-dol­lar re­call of its new­est cell­phone, the Galaxy Note 7, af­ter re­ports emerged that some bat­ter­ies in­stalled in this model were prone to catch fire and ex­plode. While the com­pany has blamed this on a man­u­fac­tur­ing process, some in­dus­try ob­servers have pub­licly stated that de­ci­sion-mak­ing within Sam­sung was overly am­bi­tious with the launch sched­ule – pre­sum­ably to pre­empt its ri­val, Ap­ple, which was poised to launch iPhone 7, its new­est model, just weeks later.

Third, Cana­dian fed­eral govern­ment bu­reau­crats are knee-deep in a scan­dal in­volv­ing a hor­rif­i­cally glitch-rid­dled roll­out of the govern­ment’s new in­ter­nal pay and ben­e­fits sys­tem called Phoenix.

More than 80,000 fed­eral em­ploy­ees have been af­fected: Some have not been paid for months, and oth­ers are be­ing over­paid. There’s still no word on when these costly, dam­ag­ing mal­func­tions will be ironed out.

Why wasn’t Phoenix tested more thor­oughly? In­di­ca­tions are that project de­ci­sion-mak­ers were hasty to launch it, be­cause their bonus pay was tied to a one-time roll­out. Here’s how that got in­ter­preted: Launch on time at any cost or you’ll be pe­nal­ized. So, they launched on time. At in­cred­i­ble cost.

In each of these cases, peo­ple did what they were paid to do. Pay drives per­for­mance. It’s the No. 1 mo­ti­va­tor of hu­man be­hav­iour in busi­ness.

Wells Fargo’s team boosted cross­over sales. VW sold more cars. Sam­sung shipped a prod­uct ahead of its ri­val. And bu­reau­crats kept a big project on track to launch on time. And yet none of those goals mat­tered when the price of meet­ing them be­came ap­par­ent.

Wells Fargo didn’t build over­sight into its sales strat­egy. The group re­spon­si­ble for Phoenix chose the wrong met­rics. In the case of VW, they failed on both of those counts.

Pay for per­for­mance works well, but only if you are mea­sur­ing the right things in align­ment with what this com­pen­sa­tion model is meant to solve.

Wells Fargo should have had per­for­mance bonuses in place around cus­tomer sat­is­fac­tion. This would have en­sured that un­happy cus­tomers were caught quickly and their con­cerns ad­dressed fully. It would have pro­vided an in­cen­tive to find out why “too good to be true” sales achieve­ments were hap­pen­ing within the bank. Coach­ing would have gone a long way in di­ag­nos­ing the prob­lem, too; it would have forced the team to spell out how it was achiev­ing its goals.

The ex­ec­u­tives re­spon­si­ble for the Phoenix roll­out used the wrong met­rics to de­fine good per­for­mance. Pay bonuses should have been tied to a much bet­ter def­i­ni­tion of what con­sti­tuted a suc­cess­ful launch. That would have en­cour­aged greater fo­cus on prelaunch trou­bleshoot­ing, com­bined with a stag­gered roll­out strat­egy.

At VW, ex­ec­u­tive com­pen­sa­tion should have been based not just on growth and share price, but on ser­vice ex­cel­lence and cus­tomer stan­dards. That would have in­stilled more checks and bal­ances and given peo­ple in­cen­tive to stand up and say “no” rather than ac­cept a way of work­ing that ul­ti­mately proved dev­as­tat­ingly costly to the com­pany.

No ex­ec­u­tive in their right mind plans a growth strat­egy that en­tails the kinds of disas­ters that hap­pened at Wells Fargo and else­where. That’s why it’s im­por­tant to choose smart growth – one that’s built on an at­ten­tion to the right de­tails, to liv­ing up to good cor­po­rate val­ues and then re­ward­ing peo­ple ac­cord­ingly.

Colleen Fran­cis is an Ot­tawa-based sales con­sul­tant and owner of En­gage Sell­ing So­lu­tions. She has worked with or­ga­ni­za­tions such as Ab­bott, Merck, Mer­rill Lynch and RBC and is the au­thor of the best-sell­ing book, Non­stop Sales Boom.

Frankly, there’s noth­ing wrong with pay­ing for re­sults; many of my clients do this successfully. The trou­ble starts when re­sults over­shadow all other met­rics of suc­cess. When that hap­pens, teams nat­u­rally con­clude that achiev­ing tar­gets at any cost is the only op­tion

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