The study by Macquarie University into the impact of remuneration structures on the performance and compliance of financial sector staff concluded that performance-based remuneration practices, especially those based on balanced scorecards, are “flawed”.
In fact, Bank of Queensland and Westpac-owned Bank of Melbourne both faced criticism during the banking royal commission that sales pressures contributed to breaches of responsible lending provisions to SMEs.
Despite bank executives defending short-term variable remuneration as a means of motivating staff to do their best, the university’s study of 318 financial services workers instead showed “remarkably similar” levels of productivity for those who have financial incentives that are based on balanced scorecards and those who operate under a fixed remuneration structure.
It found that variable remuneration was found to be most effective in boosting performance in “very simple situations”, such as those that involve just one performance indicator that can be easily and objectively measured.
Macquarie University’s Applied Finance Centre associate professor Elizabeth Sheedy attributed the limited improvement in performance to staff being slowed down when having to consider potential ethical compromises.
“The decision to breach, or not breach, policy slows participants down as they weigh up the chance of being caught and possible consequences. They must also consider issues such as moral identity and social standing, further slowing down the speed of mental processing,” Dr Sheedy said.
“Under fixed remuneration, there is less need to consider such issues, and so the often-claimed loss in productivity is not observed.”
Dr Sheedy noted that the aims of profit generation and compliance were sometimes at odds with each other, particularly in the short term.
According to the university’s study, the highest rate of compliance with company policy was achieved under a fixed remuneration, with 75 per cent of participants completely compliant across all transactions.
The compliance rate dropped to 62 per cent under a simplified balanced scorecard system and further to just over half (51 per cent) for those who have a compliance gateway.
“With these findings, it seems appropriate for the financial services industry to reconsider the use of the balanced scorecard for remuneration purposes,” the Macquarie University report stated.
Nearly 68 per cent of participants in the Macquarie University study indicated that their variable remuneration is based on a balanced scorecard, almost 22 per cent said that their remuneration was not based on a balanced scorecard and nearly 11 per cent were unsure.
Only 21.2 per cent of participants whose remuneration is based on a balanced scorecard said that 30 per cent to 50 per cent of their scorecard is comprised of “risk/compliance/behavioural matters”.
Dr Sheedy even believes that it is becoming “increasingly difficult to justify the use of variable remuneration in financial services” (even for those who are not based on balanced scorecards) given what past and present research continues to show.
“I hope industry leaders and regulators will seriously consider this issue as we continue to do research in this crucial area of performance measurement and remuneration,” the associate professor said.
The study follows Commonwealth Bank CEO Matt Comyn’s testimony to the financial services royal commission that defended short-term variable remuneration, saying that it “elicits discretionary effort” by frontline bank staff, subsequently improving their performance and helping create “an even playing field” for financial institutions and intermediaries such as mortgage brokers.
According to Mr Comyn, having a portion of remuneration that is not fixed motivates staff to do their best in whichever way they are measured. He added that CBA is increasingly focusing on customer outcomes, after admitting to the royal commission that the major bank’s remuneration and incentive structures “were not, in some instances, aligned to good customer outcomes”.
“Clearly, the design of the performance management systems [and] routines are very important in terms of ensuring that we do not drive perverse outcomes from either incentive design or financial motivation,” Mr Comyn said.
“Over time, one of the major changes that we’ve made is reducing financial weightings and outcomes. For my role, my short-term variable remuneration is only 30 per cent. For my predecessors, it would have been 60 per cent. We’ve tried to adopt that principle right through the organisation to have alignment.
“I do not sit here today saying that there are no further opportunities to improve remuneration. I think it’s still an open issue in my mind.”
Victoria Whitaker of The Ethics Centre previously told My Business that financial rewards overly geared towards sales – not just in the financial sector but in any organisation – can undo employer efforts to maintain compliance and organisational values.
“Directors are pulling their hair out going ‘we just don’t understand why people are making these decisions’,” Ms Whitaker said.
“But it’s very clear they’re being rewarded for something that they believe the organisation thinks is good, even though when they stick them on the wall – these are our values, the things we believe are good – they’re quite different.”