Giving employees incentives to do a good job can go a long way in getting results, but as we learned with Wells Fargo’s recent fake account fiasco, it can also cause serious issues: hefty fines, loss of customers, and fired executives. One top banking official says the issue needs to change this culture now, and learn to balance incentives with the interests of the customers.

William Dudley, President of the Federal Reserve Bank of New York, addressed this issue — and explicitly called out Wells Fargo for its bad behavior — this morning at a Banking Standards Board meeting in London.

While Dudley notes that incentives are a powerful tool for communicating the conduct and culture firms desire, pushing goals can cause just the opposite to occur.

“As I have argued before, incentives shape behavior, and behavior drives culture,” Dudley said in prepared remarks. “If you want a culture that will support your long-term business strategy, you need to align incentives with the behaviors that will sustain your business over the long haul.”

That was apparently not a strategy used by Wells Fargo, where Dudley says there was a “mismatch between the values Wells Fargo espoused and the incentives that Wells Fargo employed.”

“Compensation, once again, seems to be at the center of a scandal,” he said. “And, like mortgage brokers in the early 2000s, it appears that job security depended almost exclusively on meeting targets, regardless of how those targets were met.”

Dudley said that he wouldn’t draw definitive conclusions from Wells Fargo’s scandal as the investigation is ongoing. However, he noted that there is a powerful role — for good or for bad — that incentives can play in an organization.

“I am convinced that a good or ethical culture that is reflected in your firm’s strategy, decision-making processes, and products is also in your economic best interest,” he said.

By creating a good or ethical environment, banks can lower cost of internal monitoring, encounter smaller problems, cultivate credibility, and attract more clients.

“Good culture is, in short, a necessary condition for the long-term success of individual firms,” he said. “Therefore, members of the industry must be good stewards and should seek to make progress on reforming culture in the near term.”

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