Wells Fargo is a victim of the cobra effect.

Anyone who follows this blog knows that I rarely hold a grudge, and I wouldn’t say I like kicking an individual or organization while it is down. I am just not wired that way. This week, I am going to make an exception because of the lesson that can be learned from everyone in the Agile community. I am talking about Wells Fargo and its latest scandal regarding opening bogus new accounts for existing customers.

This isn’t the first time I have had my differences with Wells Fargo. They were involved in a financial literacy campaign that denigrated humanities majors and liberal arts students. Now, thanks to federal regulators, they are paying a 185 Million dollar fine for creating new accounts for customers without consent. This gets to something the agile community calls perverse incentives.

One of the central tenets of “scientific management” is that you measure how an employee does their job, and then based on the data, as a manager, you figure out how to make that employee more efficient. On the surface, it seems like a brilliant idea. A business person measures how work is done, and then they strive to use that data to improve the speed and quality of the work. This is where the perverse incentives come into play. If you measure something and then use it as a performance incentive, it ceases to be helpful because it will force people to game the system to meet the metric. This is called the “cobra effect,” and I have blogged about it repeatedly.

Based on his testimony to Congress, Wells Fargo CEO John Stumpf said that he set up the incentives to “cross-sell” bank services to improve the company stock price. This was the beginning of over two hours of uncomfortable questions and criticism from both Democratic and Republican congressmembers. You know that you have done something terrible when both Democrats and Republicans denounce you in public.

It did not have to be this way. Stumpf could have measured performance and created training and education programs to make his staff learn how to better “cross-sell” products. Instead, he used the blunt instrument of job incentives, and it worked for a while until regulators and Congress got involved. Wells Fargo now faces additional investigation and possible criminal penalties. It did not have to be this way, but the “cobra effect” can claim another victim, and it could be a major American financial institution.

Until next time.