The Australian parliament’s House of Representatives Standing Committee on Economics released its first report into the behaviour of major banks (see HERE).

It is an interesting read, in so far as the conclusions are drawn by parliamentarians from responses made by major bank CEOs before the investigating committee. Guerdon Associates read the report’s conclusions, examined the transcripts, and looked at the extracts in the report for what we expected to be the juicy bits. However, we could not make a direct connection between many conclusions and what was said about incentive remuneration and culture.

For example, as the report puts it (with our emphasis underlined):

“There is little to no understanding of the best interests of the customer. Drivers such as performance targets and bonus payments exist to push staff to make sales and drive profits for the banks. Customer need is a secondary issue. The bank CEOs will argue that customer needs are taken into account by employees because they utilise a balanced scorecard for all employees’ performance management.”

There was no evidence that we could see in the transcripts that customer need is a secondary issue. All the major banks have customer service on their scorecards to various degrees. This may make economic sense, given the present value of new customers and, subsequently, the cost of churn through poor service, assuming that the Committee’s initiatives to make bank switching easier come to fruition. Unfortunately (and bizarrely, given the name of the investigating Committee), there is virtually no financial or economic analysis in the report that considers the cost or benefits of poor bank behavior.

There were some areas covered by the enquiry that came tantalizingly close to adding value:

“Staff are required to meet a rate of at least 100 per cent of the sales target. The only metric that is discussed every day by managers is the sales target. Failure to reach the required sales target will result in the implementation of performance improvement mechanisms and may result in the removal of underperforming staff from the business.”

“Targets are employed at every level of the business and are the key driver of poor behaviour.”

The observation (although that may be an inappropriate noun, as again there is no direct evidence provided of the Committee having observed this) that sales targets were the only things discussed every day may be a function of a very effective incentive system, that is not sufficiently balanced by other targets in the scorecard, such as customer service. That is, an incentive system requires a number of elements to be effective, such as frequency and relevance of feedback. There may be a lot more feedback on sales built into bank systems than there are for customer service. This is not to say that the sales target components of the scorecard are bad, per se, but that the systems supporting the other components may not be quite as effective to get employees’ attention.

Unfortunately, the enquiry did not delve into these points to, firstly, verify the Committee’s observation, and secondly to consider likely causes of an emphasis on sales targets over other scorecard requirements.

There was also an absence of the quantification of good sales behaviour versus bad behaviour.

Very little of the enquiry appeared to focus on risk management and control systems, which are a necessary component of any effective incentive and reward system.

In all, the enquiry could have provided interesting insights, but did not appear to deliver.

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