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Wells scandal could lead to industrywide assessment of retail staffer pay

Inthe wake of regulators clampingdown on Wells Fargo& Co. for widespread problems with fraudulent account openings,other large banks are surely sensing pressurefrom regulators and investors to scrutinize their retail sales and compensationprograms, industry insiders say.

Boards are likely to grow increasingly active on thesefronts, they add, because bank directors are ultimately tasked with ensuringthat management teams are not only pushing for revenue growth but doing soresponsibly. Directors of large banks do not commonly get into the weeds offront-line operations, analysts say, but against the backdrop of the Wellsmess, more of them are likely to take steps to make sure they understand salesand compensation programs, and try to assure that they are fair and realistic.

"Whenthere is such a high-profile issue that results in billions of dollars in lostmarket capitalization, and when it has to do with products that are at the coreof Wells Fargo's retail bank, at the heart of what many banks do,"regulators and investors "are going to really dig into it," TerryMcEvoy, a Stephens Inc. bank analyst, said in an interview. "I wouldexpect there will be pressure on many bank boards to take a deep dive andreally get a better understanding of what motivates employees and to make sureit is in the best interest of customers."

Atissue: The Consumer Financial Protection Bureauon Sept. 8, along with other regulators, said Wells was fined $185 million forallegedly allowing thousands of employees to open some 2 million fake accountsover several years. The San Francisco-based bank fired roughly 5,300 staffersit linked to the matter. But in testimony before a U.S. this month, WellsChairman and CEO John Stumpf conceded that the problem festered for at least acouple of years before top executives and directors understood its breadth andseverity.

Critics have blamed a pressure-cooker culture at Wells thatspurred employees to open the sham accounts in order to meet unrealistic salesgoals and receive bonuses.

CFPBDirector Richard Cordray said in prepared testimonyfor the Senate hearing this month that the Wells fines "should servenotice to the entire industry" that regulators will be looking for similar problems acrossthe sector. Investors, meanwhile, have spoken with their money, selling offWells shares. The company's stock has fallen nearly 10% since the fines wereannounced. Wells declined to comment.

RichardClayton, research director at Wells shareholder CtW Investment Group, said inan interview that "not getting nailed by regulators should be a core goalfor any bank." He said boards need to get increasingly active to ensurethis happens.

Claytonnoted that Wells has vowed to eliminate branch sales goals and that it hashired a law firm to help investigate its sales culture. In fact, Wells saidthis week Stumpf would forfeit $41 million in promised compensation as well ashis usual salary during the investigation, which will be spearheaded by thebank's independent directors. Wells also said that Carrie Tolstedt, untilrecently head of the division in which the false accounts were opened, had leftthe company ahead of a planned retirement later this year and that she hasagreed to forgo unvested equity awards of about $19 million, among otherconcessions. Neither executive will receive a 2016 bonus.

ButClayton said investors, regulators and lawmakers —Stumpf next faces the scrutiny of a U.S. House committee Sept. 29 — will want to see much more.He said directors at Wells and all banks with large retail operations need togo much farther than punishing a couple of executives following mishaps. Theyneed to ensure that management teams are not putting unrealistic pressure onstaffers, he said, to prevent future debacles.  

"It'sgot to be a priority for the board," Clayton said. "There was clearlyvery real risk that the [Wells] board failed to recognize. Directors verynecessarily need to understand front-line sales practices andcompensation," because the board "needs to set a clear standard formanagers."

GivenCordray's public warning, Clayton added, it is clear that this is imperativefor the industry, not just Wells. "Other banks would be extremely well-advisedto review their human capital management practices," he said. "Thefocus will be on the industry as a whole,"starting with other big lenders, "andall banks should want to make sure they are not going to be the next WellsFargo."

Infact, Clayton said, CtW already has sent a letter to Wells on the matter andthis week it is preparing additional letters to send to several more largecommercial banks, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., U.S. Bancorp and PNC Financial Services Group Inc.

David Baris, a Washington, D.C., lawyer and bank adviser whois currently president of the American Association of Bank Directors, said inan interview that, while there is no way to quantify the involvement of bank boards on salespractices, "my gut tells me that many bank boards have not paid muchattention to this."

Asmore of them now sharpen their focus, he suggested in a blog post,a board should start by asking management teams a range of questions to assessthe bank's sales goals and related compensation —or consequences for failing to reach targets — and what measures are in placeto ensure that employees pursue objectives in ways that do not misrepresentproducts or treat customers unfairly. Directors, he said, should look forestablished procedures that enforce standards and monitoring tools that canhelp root out problem behavior.

Carll Wilkinson, managing partner at bank recruitment firmSmith & Wilkinson, agreed that many directors are realizing they do notknow enough about branch-level sales and compensation and should ramp up theirown inquiries on these fronts.

"Thishas obviously shown itself to be an area of risk that I don't believe was on alot of people's radar," Wilkinsonsaid in an interview. He said the issue is bound to intensify in coming yearsas more customers bank online, rather than at physical locations, amplifyingchallenges for branch employees to meet lofty sales goals.

Wilkinsonsaid: "The malfeasance that went on at Wells Fargo is part of a broaderproblem that retail branch banking has suffered from, and that is one ofunrealistic expectations for moving product. … More boards will have to take notice."