In the early 2000s, Wells Fargo corporate executives saw cross-selling as a pathway to growth. Makes sense: It's easier to sell to existing customers than to acquire new customers. If you already had a Wells Fargo checking account, employees would encourage you to open a savings account. Get a credit card. Sign up for overdraft protection. Take out a short-term loan.
Problem was, Wells Fargo employees -- and their managers -- were given significant cross-selling targets. If they didn't meet those quotas, they could be reprimanded or even fired.
You can guess what happened next. Faced with impossible targets and the need to put food on their family's tables, many employees took matters into their own hands and set up new accounts, credit cards, loans, and other services without telling -- or asking -- customers for permission.
And with the approval, and sometimes even encouragement, of their supervisors, who had their own branch quotas to meet.
Years later, approximately 3.5 million people would realize they had accounts they never applied for, and Wells Fargo ultimately paid approximately $3 billion in penalties and fines.
Extreme example? Absolutely.
Yet what you expect -- or reward -- drives very specific behaviors, often with unintended consequences.
Say your goal is to increase sales and grow your business. So you decide to reward salespeople for generating revenue. Sounds smart.
But if your salespeople have reasonable price discretion, they can be tempted to cut prices to the bone, land the job, book the revenue, book the commission...and let someone else worry about the job's profitability.
If you're struggling and you're desperate to keep the lights on, maybe you'll take any revenue you can get.
Otherwise, the outcome you want is profitable revenue, which means the right incentive will reward salespeople on profitable revenue, not just gross revenue. Then your salespeople have an incentive to sell more work -- and at price levels that help you turn a profit.
Here's a less obvious example. Say you're in a fast-moving, rapidly changing industry, and a key to the future success of your company is innovation and creativity. (Arguably the key to future success of any company, in any business, is innovation and creativity.)
Yet research shows how you make promotion decisions is unlikely to support that goal. An MIT survey of over 400 organizations found that "pursuing ambitious goals" and "innovating" came in last among the factors managers use to make promotion decisions. Past performance (the runaway leader), political connections, and collaboration with other departments were significantly more important.
Or as the authors of another study write, "In a controlled laboratory setting, we provide evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. Subjects under such an incentive scheme explore more and are more likely to discover a novel business strategy than subjects under fixed-wage and standard pay-for-performance incentive schemes." And, by extension, standard "who gets promoted" decisions.
Or as the author of this classic study writes, "Chances are excellent that managers will be surprised by what they find -- that their firms are not rewarding what they assume they are. In fact, such undesirable behavior by organizational members as they have observed may be explained largely by the reward systems in use."
Psychologists and economists -- and platitude-loving businesspeople -- agree: You are what you measure. Peter Drucker said you can't improve what you don't measure.
But you are also, in your professional and personal life, what you reward.
So make sure your targets, and your rewards, result in the behavior you actually want.