Saturday, October 1, 2016

Thank You Wells Fargo...For Reminding Us of the Nature of the Employment Relationship

The biggest business story of the past month has been the Wells Fargo banking scandal. Driven by pressures to sell banking customers additional products, thousands of employees created perhaps two millions new accounts without customer approval. Over 5,000 workers were fired for creating fraudulent accounts, and some who were fired for failing to meet sales goals are suing Wells Fargo for wrongful termination. One lawsuit alleges that “The managers and bankers routinely harassed and pressured [the plaintiff] and she was denied promotions and bonuses because she would not engage in the unethical and fraudulent banking practices for unethical quotas.” 

This unfortunate mess raises many problematic issues, such as ineffective regulators, unrealistic pressures for unending corporate financial and stock returns, predatory corporate culture, leadership failings, and the danger of incentives (from stock incentives at the top, to managerial bonuses in the middle, down to the incentive to simply keep one’s job as a teller at the bottom of the banking organizational chart). And we shouldn't overlook the personal distress experienced by individual employees ("Wells Fargo's insatiable greed made me a monster," StarTribune, Sept 30, 2016). But I want to thank Wells Fargo for reminding us of the nature of the employment relationship.  

The debate over the nature of the employment relationship is as old as modern capitalism itself. Adam Smith’s model of self-interested employees and employers trading as equals in markets guided by the invisible hand continues today as the intellectual foundation of neoliberalism. I have called this the “egoist” employment relationship because of its emphasis on individual self-interest and personal responsibility. In order for this to work effectively for employers and employees, labor markets must be ideally competitive, not destructively competitive. This requires employees to have reasonable alternatives that are accessible without excessive switching costs, both economic (e.g., moving costs) and psychological (e.g., stress over the uncertainties of the nature of a new job, or a bias towards over-valuing what you already possess). In this way, if someone doesn’t like their pay, working conditions, or other elements of their job, they can legitimately quit and get another decent job commensurate with their skills and abilities. Minimal institutional supports like unions or protective labor legislative are not needed because competitive markets protect workers from abuse; indeed, they are bad if they interfere with the ideal discipline of the invisible hand.

The Wells Fargo fiasco seemingly rejects the accuracy of this way of thinking. Workers clearly didn’t feel that they could simply quit and find a comparable job. Instead, over 5,000 succumbed to corporate pressure to meet unrealistic targets, and thereby acted unethically by creating fake accounts to keep their jobs. Competitive labor markets also require potential employees to have good information about the nature of jobs, and one can question whether employees joining Wells Fargo fully understood these pressures. And competitive consumer markets require well-informed consumers, which also doesn’t appear to the case here. For example, many customers with potentially fraudulent accounts couldn’t remember whether they had requested them or not. The neoliberal or egoist model of the employment is an important theoretical baseline, but seemingly too idealistic for the messiness of real-world markets, human behavior, and therefore, employment relationships.

An alternative to the neoliberal or egoist way of thinking is the unitarist model of the employment relationship. Ideally competitive labor markets are not required, but this approach critically rests on a belief that the interests of employers and employees are largely one and the same (unitarist = unity of interests). Or more precisely, a belief that well-designed managerial policies and practices can always be found that align the interests of workers and their employers. For example, offering decent pay and benefits will create engaged, loyal workers who reward the employer with high levels of performance that serve the business and its customers. Minimal institutional supports like unions or protective labor legislative are unnecessary because companies will create win-win human resource management policies. The Wells Fargo fiasco seemingly rejects the accuracy of this way of thinking, too. Performance standards were unrealistic and incentives at various points of the corporate hierarchy were extreme. Ethical workers were fired; customers were harmed. And these problems were not self-corrected or policed internally. Rather, these practices were exposed by the Los Angeles Times which then resulted in a lawsuit against Wells Fargo by the Los Angeles city attorney.

This isn’t to say that high-commitment forms of human resource management (“high road” HRM) are a failed project. Well-designed HRM policies and practices are essential for any organization, and we need more HR leaders with sophisticated ways of thinking (like one gets with a Minnesota Master’s degree in HRIR!). But it is to say that as a society, we cannot rely solely on corporate self-interest and well-intentioned managers.

Which brings me to the pluralist employment relationship model. The pluralist model rejects the neoliberal assumption of ideally competitive labor markets, and again, the Wells Fargo scandal highlights why. Moreover, the pluralist model embraces a plurality of legitimate interest in the employment relationship. Yes, there are some interests that employers and employees have in common, but unlike the unitarist way of thinking, pluralists believe that there are also conflicts of interests. But both employer and employee interests are legitimate so none should be exclusively prioritized over others (akin to a pluralist democracy in the political sphere). HRM practices are important for aligning shared interests, but society should not rely exclusively on corporate self-interest to look out for workers. When times are tough or there are excessively strong pressures for financial returns, some companies favor their own interests at the expense of employees. This seems to me to be a better characterization of what happened at Wells Fargo than the other two models of the employment relationship can provide. And consequently, Wells Fargo employees have turned to the courts for relief. In other situations, they might turn to labor unions or other outside, institutional supports. In whatever form, institutional supports for employees, independent of the vagaries or markets or enlightenment of managers, are needed.

In conclusion, how we think the employment relationship works is critically important for determining the extent to we as a society want to rely solely on markets or managers for setting employment terms and conditions. It’s difficult to truly gauge the actual nature of the employment relationship in practice. But we can look to situations like what’s unfolded at Wells Fargo for clues. Maybe it's just me, but I see another example that supports the accuracy of the pluralist model.

135 comments:

  1. This comment has been removed by the author.

    ReplyDelete
  2. A proper allegory which help to understand the concept of legitimate competitive market economy as opposed to markets with unequal/unbalanced competition on one hand and on the other the unitarist and pluralist models in HR management. Quite insightful.

    ReplyDelete
  3. Great article! When I think you can't top the last article you do every time.

    ReplyDelete
    Replies
    1. Thank you for all of your nice comments on many of my blog posts. I'm glad you find them enjoyable and beneficial!

      Delete
  4. Thank you, as this real life example is a very good summary of the lesson.

    ReplyDelete
  5. This was a great way to connect what I am learning in the Coursera class to the real world.

    ReplyDelete
  6. Wow...This course is so interesting. The article too.I think the US don't support just cause protection for her employees.. What in a case where a male manager tries to make advances on a lady and she refuses.If she got fired by the manager.so no protection?

    ReplyDelete
  7. Very interesting article. I owe coursera

    ReplyDelete
  8. be honourable at work and everything you do

    ReplyDelete
  9. Managing people is not just about leadership but is also about wise policy design and implementation. Another perfect article where I relate / understand the meaning of your quote, Professor.

    ReplyDelete
  10. This example indicates that neoliberalism still exist in our society today due to lack of checks and balances on the large corporations and institutions.

    ReplyDelete
  11. This comment has been removed by the author.

    ReplyDelete
  12. very helpful example to understand the importance of the good HR strategy and its effects on the employees performance and honesty towards their company and clients.

    ReplyDelete
  13. In Syria,where I live the employees favor lifetime employment as it minimize risks such as dismissal. This model of employment does exists in public sector. This model provides some sort of protection on one hand but those employees productivity is under expectations on the other hand.

    ReplyDelete
  14. Great article! This really just drives the message home effortlessly

    ReplyDelete
  15. always i get great articles those making meaning full

    ReplyDelete
  16. That's a good One! Thanks for sharing!

    ReplyDelete
  17. A good article. Fear of being dismissed caused a catastrophe of doing illegal accounts.

    ReplyDelete
  18. This explained the topic well. A great read!

    ReplyDelete
  19. This gives a clear a understanding of the topic "knowing your legal constraint..Great article Professor

    ReplyDelete
  20. Interesting...makes me want to do more research on the outcome of those wrongful termination lawsuits.

    ReplyDelete
  21. Thank you for sharing, very interesting article

    ReplyDelete
  22. Nice and very helpful top for us..

    ReplyDelete
  23. In whatever form, institutional supports for employees, independent of the vagaries or markets or enlightenment of managers, are needed. Indeed wise implementation of HR policies and strategies are need not solely dependence on high way road HR. Thanks, sir!

    ReplyDelete
  24. Ótimo artigo! Esclarece muito bem como podemos melhorar a relação de trabalho.

    ReplyDelete
  25. It is a good example and summary of what i have learnt so far.

    ReplyDelete
  26. Big companies trying all avenues to test where they can and cannot guide themselves.

    ReplyDelete
  27. Greed and self interest. Great article.

    ReplyDelete
  28. Very Interesting Article. Worth Reading

    ReplyDelete
  29. Very interesting. Good Article

    ReplyDelete
  30. Very insightful article, professor> I was struggling with this concept. This example really helped me. Thank you.

    ReplyDelete
  31. Interesting article,Very helpful

    ReplyDelete
  32. This was really helpful to understand the employment relationship model with such a live example.

    ReplyDelete
  33. HOW WOULD YOU EXPLAIN THE SAME IN THE PRESENT DAY SCENARIO WHICH HAS BEEN IMPACTED DUE TO COVID-19 SIR?

    ReplyDelete
    Replies
    1. In my opinion, COVID-19 has magnified the issues raised here. It has highlighted inequalities and I think this statement is now even more appropriate: "how we think the employment relationship works is critically important for determining the extent to we as a society want to rely solely on markets or managers for setting employment terms and conditions."

      Delete
  34. Big companies trying all avenues to test where they can and cannot guide themselves.

    ReplyDelete
  35. Wow! wow!wow! Really mind blowing. You killed it sir. i have a better understanding now of the last lesson. you are a genius. Thank you so much for all the knowledge shared

    ReplyDelete
  36. Nice and helpful for understanding

    ReplyDelete
  37. Great article sir. Very informative and helpful for us. Thankyou.

    ReplyDelete
  38. This has enlightened me alot ...great article

    ReplyDelete
  39. Yes, after seeing to fail the other relationship models, pluralist can create a hope as it has a balancing scale for both employee and employer. Very good analysis and explained simply . Thank you, sir.

    ReplyDelete
  40. This is an eye opener for workers at will and the behaviour of managers

    ReplyDelete
  41. This is an interesting insight, beneficial and enjoyable article.

    ReplyDelete
  42. Wooow! "Labour markets should not be destructively competitive rather it should be ideally competitive". This really educative. Thanks for sharing

    ReplyDelete
  43. Thanks for the Wells Fargo fiasco where the employees acted unethically by creating fake accounts to keep their jobs. It is an eye opener.

    ReplyDelete
  44. The Article is very insightful and a thank you so much for all your effort that you take in making each and every article a meaningful one and give us detailed understanding on it.Its an honour to be part of this Course through Coursera and having such a devoted Professor Mr. John. W. Budd as our Mentor.

    Regards
    Rumpa Narayanan
    Coursera Student

    ReplyDelete
  45. Great article and every informative!!!

    ReplyDelete
  46. The reality of employment relationship is more crucial to people managers than what is been said in books. I think this article has highlighted alot. Thanks Sir!

    ReplyDelete
  47. ok... what other example supporting the accuracy of the Pluralist model comes to mind?

    ReplyDelete
  48. Employers should always consider the employees in setting up any policy.

    ReplyDelete
  49. Thank you for the article and how it relates to what I'm learning

    ReplyDelete
  50. This indicates that managers and employees efficiency in organizations mostly depend on employment relationship. Thanks for the write up.

    ReplyDelete
  51. This is a very interesting article great job

    ReplyDelete
  52. This article helps us to know more about HR strategy

    ReplyDelete
  53. this article gives hope to the lay man that he is worth the honor and dignity in labour irrespective of what employers think.
    a very standard reality to connect with .

    ReplyDelete
  54. Thank you very much professor, I really appreciate all your articles and the way you teach us , this example is a good lesson in HR management.

    ReplyDelete
  55. Thank you for sharing this piece of knowledge.

    ReplyDelete
  56. WAO, very educative. thanks for sharing.

    ReplyDelete
  57. Sharing this has really praticalized the lesson

    ReplyDelete
  58. Very good example to show the importance of HR/Managerial Strategy. The Concept of Corporate self-interest was clearly evident.

    ReplyDelete
  59. Really appreciate to increase the knowledge.

    ReplyDelete
  60. Thanks for sharing such a knowledge

    ReplyDelete
  61. Good piece of information. Now with the covid pandemic most companies have laid off their staff without proper presentation and illegally.

    ReplyDelete
  62. Absolutely. And what a way to explain the points. The points are so correct and very well explained..

    ReplyDelete
  63. Completely insightful. Thank you sir.

    ReplyDelete
  64. I think both the employer and the employees should be regulated to bring fair, justice and equity to the employment relationship

    ReplyDelete
  65. Thanks professor John Budd for this article.

    ReplyDelete
  66. Thankyou for such a lovely article

    ReplyDelete
  67. Thank you Professor for the interesting article and fresh example of unsuccessful managerial experience.
    I do have another example of the recent situation in Kazakhstan when on the governmental level there was made a decision to oblige every medical nurse who is dealing with kovid vacination to have a daily plan of a certain amount of vacinated people a day. Of course nurses around the counrty could not find enough volunteers and those who would like to be vacinated which let to a catastrophic result. This unrealistic pressure that the government imposed on the medical specialists resulted in the huge corruption precedent. Medical staff started to sell vacine cards, and destroy the ampules with vacine in it. People started to BUY the vacination without being vacinated. Now there are millons of people who were really vacinated and millions of who were "fake" vacinated. Which of course is causing many other problems at the moment.

    ReplyDelete
    Replies
    1. Thank you for sharing this interesting, but unfortunate, example.

      Delete
  68. Prof well done again. I always enjoy your articles. This simply shows that ideally competitive market is unrealistic because whenever times are tough or there are excessively strong pressures for financial returns, some companies favor their own interests at the expense of employees, and give unrealistic targets to the employees. And this always lead to termination of affected employees. This is one reason that labor union is a necessity in labor market.

    ReplyDelete
  69. Thank you professor for this article. I thoroughly enjoy each of your article and learning a lot !!

    ReplyDelete
  70. this article makes me think in the importance of be part of the organization as someone who has a voice and not just follows the rules, I usually forget that

    ReplyDelete
  71. Very nice article and very important ideas. Thank you

    ReplyDelete
  72. Thanks so much Prof for this article, it goes a long way to explain the complicated world for managers. in my country however, the labour laws are weighty but can be very laborious to get. The employee must attimes would rather just submit to his fate and move on after being treated unjustly know how cumbersume it is to get the the desired judgement. Because of this, manager on thier part will swing the shot at being unethical.

    ReplyDelete
  73. Very interesting. Balance is a good option.

    ReplyDelete
  74. Thanks for sharing very interesting and good experiences at other company.

    ReplyDelete
  75. A great article indeed! ... emphasis on the importance of how we perceive the employment relationship and the need for robust institutional supports beyond market forces and managerial intentions.

    ReplyDelete
  76. Highly educative and impactful article. Thank for sharing professor

    ReplyDelete