This article, originally published at 8:05 a.m. today, has been updated with comments from Wells Fargo CEO John Stumpf.
Wells Fargo (WFC - Get Report) said Tuesday it would end the retail-bank sales targets that regulators say helped motivate thousands of employees to illegally open unauthorized customer accounts to meet performance goals.
The move, set to take effect in early 2017, aims to shore up confidence among customers that the bank is acting in their interest, CEO John Stumpf said in a statement. For more than a decade, the San Francisco-based lender has pushed employees to sell as many as eight products to each customer, a practice known as "cross-selling." The tactic, which extended to credit cards, mortgages and deposit accounts, was cited by regulators as a contributing factor in the illegal accounts.
Over a period dating back at least five years, employees created more than 2 million accounts for customers without their consent or knowledge, according to the U.S. Consumer Financial Protection Bureau. Roughly 5,300 employees were involved and have since been fired.
"We never intended for product sales goals, or any dynamic or any part of a performance management system to be misinterpreted," Stumpf said during an interview this evening with TheStreet's Jim Cramer on CNBC's Mad Money. "So we took that off the table."
While Wells Fargo still intends to develop the deepest relationships possible with its customers using cross-sales techniques, it's trying to develop a compensation plan that rewards workers "in a manner consistent with our principles," CFO John Shrewsberry said at an investment conference today in New York. "We'll make this pivot in a way that protects our business model."
Among recent changes, the lender has hired a contractor to send "mystery shoppers" to branches to examine the quality of customer service, as well as to help detect any untoward actions on the part of bank personnel, Shrewsberry said. Wells Fargo has spent $50 million for improved employee monitoring and recently started sending "welcome" e-mails to customers within an hour any time a new account is opened in their names, he said.
"It's just another means of checking that that's what they were looking for," Shrewsberry said.
Under the terms of a settlement, Wells Fargo will pay $185 million in fines, including penalties imposed by the U.S. Office of the Comptroller of the Currency and the City and County of Los Angeles, according to a statement last week from the consumer bureau. The bank also agreed to hire an independent consultant to review the caliber of employee training while ensuring an "ethics hotline or similar mechanism" is available for reporting untoward activities.
The cost of the settlement was already covered by legal reserves set aside at the end of the second quarter, Shrewsberry said. The company has been grappling with the issues since they surfaced in 2013, he said.
The bank's decision to discontinue its sales targets follows increased scrutiny of an almost cult-like zeal for "cross-selling," which former CEO Richard Kovacevich described in the mid-2000s as "our most important strategy."
To measure its success in cross-selling, Wells Fargo tracked and reported a key metric -- the number of retail bank products per household. When the bank passed five products per household, Kovacevich urged employees to reach for six, and even eight as part of a "journey to great."
"We're over five! Shooting for six! Going for Gr-eight!" Kovacevich wrote in a public explanation of the bank's vision and values. "It's working! But we still have a long way to go."
That figure climbed to 6.11 retail bank products per household last year from 5.7 at the end of 2010, Wells Fargo documents show.
"While we still love cross-sell, we still love depth and relationships, one of the tools of getting there, we think today, doesn't make sense anymore," Stumpf said in the CNBC interview. Wells Fargo will have no more product sales goals in its retail bank, he said, to avoid the risk that "people might misinterpret those -- even if it's just a few people -- as our motivation. It's not."
According to Shrewsberry, most employees who created the unauthorized accounts were doing so because they were failing to meet sales goals, and thus in danger of losing their jobs.
"The people we're talking about here were not high performers," he said.
Roughly 10% of the people fired were in management positions, including branch heads, and about two-thirds of the individuals were concentrated in the southwestern U.S. A deeper investigation is under way to determine whether any senior executives might have been aware of the illegal accounts.
"The analysis is still ongoing," Shrewsberry said. "That's an opportunity to take a big fresh look at who knew what and when."
Ahead of last week's disclosure of the settlement, Shrewsberry said, the company assigned extra staff to handle complaints and inquiries from customers. So far, the call volume has not increased dramatically, he said.
"We've had very, very low volumes of customer reactions," he said. "It's only been a few days."
Wells Fargo probably should claw back pay from the head of its retail-banking business, Carrie Tolstedt, says CLSA analyst Mike Mayo.
According to regulatory filings, Tolstedt has been paid at least $53 million since Wells Fargo started disclosing her annual compensation in 2010. In 2014, she got a $1.3 million bonus, with the board citing her achievement of "strong cross-sell ratios."
Under the Dodd-Frank Act of 2010, U.S. companies are required to recover erroneously awarded compensation from employees -- a response to the financial crisis where some bankers took home big bonuses, only to later have their deals blow up, forcing their employers to require bailouts from the government and the Federal Reserve.
Wells Fargo spokeswoman Mary Eshet declined to comment on whether Wells Fargo planned to claw back any pay from Tolstedt, a 27-year veteran of the firm who has overseen the retail-banking unit since 2007. Eshet also declined to make Tolstedt available for an interview.
The bank announced in June that Tolstedt had decided to retire at the end of this year. Asked whether her departure was related to the probe, Eshet responded, "Carrie made a personal decision to retire."
Stumpf declined to comment on the possibility of an attempt to take back any of Tolstedt's pay, beyond saying that the company has a "board process" to handle such situations. He will appear before the U.S. Senate's banking committee at 10 a.m. Tuesday to answer questions on the bank's practices.
Wells Fargo wouldn't be the first firm to claw back pay. In 2012, JPMorgan Chase (JPM - Get Report) retrieved compensation from three executives involved in the "London Whale" debacle, in which outsize derivatives trades led to a loss of about $6 billion.
While Stumpf said he holds himself responsible whenever Wells Fargo fails to live up to its core values, he believes the best thing he can do at present is "lead this company forward through this."
The buck "stops with all of us, especially me," he said. "I'm the leader. When we don't meet our goals of getting it right 100% of the time, I'm accountable."