Lessons from Banking Royal Commission

One of the questions raised by Rowena Orr, QC in the Banking Royal Commission’s session which took place on 27th April 2018 was “How can companies incentivise good quality advice where the best advice is to do nothing?”

This question embraces a number of technical issues that a remuneration professional needs to consider when designing an incentive framework, such as including non-financial gateways; using clawbacks; selection of the relevant Key Performance Indicators (KPIs); balancing financial and non-financial KPIs and the degree of Board discretion, to name a few. In addition to these factors, a more structural consideration requires defining what “a fully performing employee” really means and how success is measured in an organisation. In essence, this is a reflection of a company’s culture.

Rowena Orr’s question also highlights the increasingly blurring line between the importance of financial and non-financial KPIs. The weighting of financial KPIs for sales positions are inevitably higher than the same for non-financial KPIs. Incentives or performance pay has always been perceived as a means to an end. By their very nature, they constitute the vital supplements to the salary of any sales role in any sector. However, the discussions which took place during the Banking Royal Commission sessions have once again unearthed the potentially “Machiavellian” impact of employee incentives.

There are two sides to every story

If the best advice that a financial planner could provide is to sell nothing, then how can a financial institution measure the quality of this advice? What would be the cost of doing nothing for a company and who would bear the ultimate cost of that option? One could argue that market dynamics change constantly, and no one could predict that ‘doing nothing would yield the best outcome’ as there are also restrictions due to inaccessibility to all relevant information at any given time and ever changing market conditions.

Further to the Future of Financial Advice (FOFA) reforms and the Sedgwick Review, the banks and other financial institutions have been reviewing their existing sales incentive schemes applicable to financial planners and retail banking employees.  A Net Promoter Score (NPS) has been widely used by the majority of these institutions and, yet, the recent events have indicated that as a KPI, NPS has not fully passed the test of reliability.

One could also argue how often ‘doing nothing’ would be deemed as the best advice. If doing nothing is the right thing then this would also reflect a potential issue with the solutions available to consumers at the time of advice.

Is there a way out?

From a ‘pure’ remuneration perspective, applying clawbacks or malus clauses and non-financial gateways could present potential improvements to incentive design for positions under review. If effectively used, non-financial gateways could constitute a sound threshold where conduct of potentially unacceptable behaviour would prevent incentive payout although a plan participant has met his/her financial KPIs. Ideally, internal compliance, reward governance and corporate governance teams should be given the appropriate level of authority to investigate potential areas of non-compliance.

Alternatively, stretching the performance period of incentive plans which are applicable to sales positions to more than one year could be a consideration to strengthen the quality of customer service or advice. If not already included as a KPI, quality of advice and the longer-term impact of advice could be used as KPIs for positions under review. However, adherence to these measures will continue to depend on the very essence of the human element, personal ethics of each employee and company culture.

Ongoing discussions and findings signal a requirement for a paradigm shift for financial institutions to measure ‘how’ outcomes were achieved rather than ‘what’ was achieved.

This article is written by Zoe Lockyer. If you have any queries or wish to discuss our views further, please get in touch with Zoe at zlockyer@eganrem.com or 02 9225 3225.