InvestmentNews Editorials

Performance-based pay may lead to problems including fines — and even a tarnished brand

Nobel prize winners studied performance-based compensation practices reported back a cautionary tale

Oct 23, 2016 @ 12:01 am

Paying staff based on how well they perform makes a lot of sense. Or does it? Two professors who won the Nobel Prize for Economic Sciences earlier this month studied performance-based compensation practices — and reported back a cautionary tale.

Yes, incentives can motivate the right employees, but depending how metrics are designed and calculated, they can encourage disastrous behavior — and the firm will ultimately pay big, sometimes with fines, other times with a tarnished brand.

Think Wells Fargo, where thousands of employees opened fake customer accounts to boost their own sales numbers and rake in higher bonuses — the costs and headaches to clients be damned. The extent of the damage to Wells Fargo is inestimable at this point, but it's safe to say it'll be huge and reverberate to other areas of its business.

Think Morgan Stanley, which was charged in Massachusetts with conducting an unethical sales contest in which financial advisers were incentivized to get clients to take loans against their investment accounts.

Even pay based on performance outside of sales targets can prove troublesome.

As InvestmentNews reporter Liz Skinner found in her story on the Nobel winners' work and how it relates to advisers, compensation tied to performance can deter managers from giving bad reviews — even when deserved. As Philip Palaveev, CEO of The Ensemble Practice, noted that in these instances the firms' costs rise because employees are paid at a level above what is justified relative to the productivity of coworkers.

He also said it could inspire the fudging of data to shift, for example, the onboarding of clients into a quarter that fits the adviser versus reality.

(More: How to calculate a fair salary for a new hire)

“In the absence of proper management and a good culture, performance-based compensation can fail miserably,” Mr. Palaveev said.

The lesson seems to be that performance is subjective, and it needs to be gauged in that light. Tying pay or bonuses squarely to figures that can be manipulated is a sure route to trickery that will not deliver a positive return on investment to a firm.


What do you think?

View comments

Most watched


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print