This week we look at the principle-agent problem and what went wrong at Wells Fargo, on March 28, 2019, Tim Sloan, the CEO of Wells Fargo, who was supposed to restore the bank’s reputation, stepped down. After a very poor showing by Sloan in testimony about the bank before Congress and with long-standing restrictions by the Federal Reserve still in place, the bank seems unable to overcome the crisis created by a whole collection of deceptive practices which rose to the level of fraud. (For more information, refer to the 2018 article “Fed Won’t Lift Wells’ Growth Cap Until Deficiencies Are Fixed; Powell” from American Banker)
You are going to advise Mr. Scharf on a key issue.
– What about the incentive system employed by Wells Fargo resulted in massive creation of fake accounts by the retail operation? And why did it only get worse from there?
*Remember Froeb’s rule, Avoid temptation to think about the problem from the employee’s point of view…(and ask) how does the organization give employees enough information to make good decisions and the incentives to do so?
Your post for this discussion should answer the question above and address components of motivation and incentive in order to present Mr. Scharf with reasonable and evidence-supported advice on this issue.
Luke M. Froeb 2018, Managerial Economics: A Problem Solving Approach 95th ed.)