It's the question bank executives should be ready to answer this earnings season.
Apart from fielding the usual queries about prospects for loan growth and strategies for controlling costs, senior executives are already being grilled on how their banks compensate front-line employees. Citigroup and JPMorgan executives were asked to address their pay practices on their third-quarter earnings calls with reporters and analysts Friday, and First Republic Bank leaders fielded similar questions on a call with analysts Thursday.
Compensation has become a hot topic since news broke last month that retail bankers at Wells Fargo opened as many as 2 million phony checking and credit card accounts in order to meet sales targets. The scandal cost the bank $185 million in fines, led to the resignation of Chairman and CEO John Stumpf and made Wells Fargo the butt of jokes on late-night television.
Wells has responded by eliminating sales goals in its branches, but its reputation is so tarnished that many consumers are taking their business elsewhere. The bank said Friday that the number of new checking accounts it opened in September was down 30% from the previous month and 25% from September 2015. Credit card applications were also down 30% from just a month earlier.
What worries investors and analysts is that Wells may not be the only bank where employees have bent the rules in an effort to pad their pay.
Over the past five years, the Consumer Financial Protection Bureau has received more than 30,000 complaints from consumers who claimed that their banks opened accounts in their names without authorization, according to several news reports. Since the Wells scandal broke last month, employees at several large banks have gone public with stories of being pressured by management to enter false information or even set up phony accounts in order to meet monthly sales targets.
In response to a reporter's question Friday morning, J.P. Morgan Chase Chief Financial Officer Marianne Lake said that the bank is taking a close look at its in-branch sales practices and that it has found some problems. She declined to go into further detail, but said the problem is not widespread and that the bank has not identified any instances of employees setting up fake accounts.
On a later call with analysts, Lake was asked if the bank intends to change the way it structures incentive compensation. She replied that management regularly reviews pay packages to make sure they reward employees for deepening relationships with customers without encouraging them to sell products customers don't want or need.
Cross-selling "is an outcome, it's not an objective," Lake said. "That is certainly the philosophy with which we have designed our compensation and performance structures for the branches. We review them regularly, at least annually, to make sure that they continue to be aligned with our objectives."
Citigroup CFO John Gerspach faced similar questions on a call with reporters Friday. He said the bank is reviewing its sales practices and that, so far, "we haven't identified anything suggestive of the type of problems with sales practices that were experienced at Wells."
He added that he expects to look more closely at banks' sales practices and said that Citi would "certainly share whatever is required in regard to that inquiry."
Even First Republic in San Francisco, a bank renowned for its customer service and its low customer attrition, could not escape questions about its sales practices. Its third-quarter profit climbed 27%, to $171.8 million, due largely to new loan, deposit and wealth management business it brought in from existing clients.
On its earnings call Thursday, Erika Najarian, analyst at Bank of America Merrill Lynch, said that "in light of the Wells controversy," investors want to know how banks she covers are compensating their relationship managers.
Gaye Erkan, First Republic's chief deposit and chief investment officer, responded that the $68 billion-asset bank bases compensation on the depth of the client relationships, not on sales of individual products and services.
"We're not counting the widgets that we're selling," she said.
First Republic is unique in that it will also claw back the pay of lenders if loans they originate go bad within the first three or four years.
"The approach to [compensation] that we've had for 30 years, quite frankly, is the exact opposite of the problem in the market," said First Republic Chairman and Chief Executive James Herbert. "Our growth comes from existing clients and they vote with their feet. If they are satisfied, they give us more business."
Kristin Broughton and Brian Patrick Eha contributed to this story.