But I Thought Incentives Were Good?

 

Ashey Liu – Honorbound

P.S. You might have to read some of this with sarcasm and a little attitude.

Incentives act as a force that encourages an individual to do something in which they would probably not do under different circumstances, and incentives are everywhere including the government and businesses. Since they act as motivation, firms and workers are more willing to become more innovative and more hardworking, which ultimately can lead to better productivity and growth within the economy. Although incentives sound like they can only be a good force, we add people to the situation, people who innately will do what they believe is best for them, which can lead to a situation worse off than before. “Self-interest makes the world go round;” however, when we take a good idea and add an atypical factor, we can expect something to go wrong [1].

Recently, the Wells Fargo scandal brought light to how incentives can lead people to greed and fraud. The company explained how it paid branch employees “with incentives tied to how often customers use their accounts… and how many accounts they open” [2]. Back in 2013, the first scandal uncovered revealed that the Wells Fargo San Francisco Bank opened around “2 million accounts without customers’ consent” to meet aggressive sales quotas that called for customers having eight products with the bank [3]. The majority of the Wells Fargo’s employees’ salaries were built upon incentives and bonuses, so in order to increase their salary and achieve their self-interest, they committed fraud. The incentive plan did push its’ employees to think cunningly about raising their salaries; however, the actions from the clever thinking, believe it or not, is illegal. Since the investigation, Wells Fargo was fined $185 million including $110 million for customer settlements and a top Federal Reserve official made a statement that “pay incentive can go wrong” [4]. Those in charge at Wells Fargo could have given “perverse incentives” in which employees could think of ways of doing “something completely different” to gain more account holders [5]. Not only would this method provide more customers; but employees would be encouraged for out of the box thinking and maybe the fraud scandal would have never occurred.

Since the incident, Wells Fargo made many statements, which included apologies and a better plan in which its employees can increase their opportunity cost without illegal methods. To this day, the bank still pays out settlements to angry customers who seek higher compensation; however Wells Fargo has been attempting to provide easier methods in which their customers can gain access to their money in hopes more people will join. If the only the bank employees had a certain incentive, adverse or perverse, that rewarded them to bring in more employees and be more innovative, then the fake account scandal wouldn’t have been an issue, and Wells Fargo would not be out $295 million.

 

  1. Wheelan, Charles J., and Burton G. Malkiel. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton & Company, 2012. 34.
  2. “Wells Fargo changes employee’s pay structure, incentive plan.” The Washington Post. January 10, 2017. Accessed March 29, 2017. https://www.washingtonpost.com/business/economy/2017/01/10/277e00ee-d751-11e6-9a36-1d296534b31e_story.html?utm_term=.860e55ec76f2
  3. “What’s wrong with bank culture? A top Fed official points to Wells Fargo scandal.” Los Angeles Times. Accessed March 29, 2017. http://www.latimes.com/business/la-fi-wells-fargo-fed-20170321-story.html.
  4. “What’s wrong with bank culture? A top Fed official points to Wells Fargo scandal.” Los Angeles Times. Accessed March 29, 2017. http://www.latimes.com/business/la-fi-wells-fargo-fed-20170321-story.html.
  5. Wheelan, Charles J., and Burton G. Malkiel. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton & Company, 2012. 36.
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