The problem with incentive pay is that it can work. And with bankers it seems you need to be careful what you wish for. That is, it does create, or reinforce, a culture that values sales. This should be no surprise, as this is how capitalism works. It should be what all private sector companies strive for. But like any effective incentive system, it needs to be focussed the right targets.

But problems can occur when it encourages product sales that people do not want, or wish they had not purchased, or is ill suited to their needs. Such customers are unlikely to return for more purchases, and are unlikely to recommend the sales person, product or bank to their friends and family. If systematic, the sales incentive program can reduce the present value of each customer from a combination of higher churn, less sales per customer, and fewer new customers. Hence a sales incentive can actually – when poorly construed – destroy value.

It seems Australian banks have, on the whole, managed their sales incentives programs well, or at least well enough to the extent value has not been destroyed.

In 2016 the Australian Bankers’ Association committed to an independent review (Review) into how the banks pay their staff or third parties for selling retail banking products like mortgages, credit cards and deposit accounts.

The former Australian Public Service Commissioner Mr Stephen Sedgwick AO, is leading the Review, which aims to identify whether commissions, bonuses or other incentives might mean the interests of bank staff are not aligned with the interests of their customers.

This Review is one part of the banks’ responses to the series of issues that have surfaced in recent years and that have led to the Opposition continuing to call for a Royal Commission into the banking industry.

Mr Sedgwick AO released his Retail Remuneration Review Issues Paper on 17 January 2017 (Issues Paper) with submissions due by 10 February and the Review due to be completed by 31 March 2017.

Importantly, Mr Sedgwick has stated in this interim Issues Paper that “few submissions … have provided clear evidence that the risks in banks’ current arrangements lead to such significant systemic risks of poor outcomes for retail banking customers as would warrant the outright banning of product-based payments”.

The Issues Paper summarises current practices and seeks further information about product sales commissions and product-based payments paid in respect of retail banking products to bank staff such as tellers, sellers and their supervisors and near managers, as well as third parties like brokers, aggregators, franchises, introducers and referrers.

The purpose of the Review is to assist in rebuilding public trust by, in part, identifying opportunities to modify or remove remuneration practices that include an unacceptable risk of promoting behaviour by retail staff that is inconsistent with the interests of customers.

Most of the banks have incentive, bonus or product-based payment arrangements for some or all of their retail staff or third parties like mortgage brokers that are directly or indirectly related to product sales. The Issues Paper acknowledges there is a risk that these arrangements may lead to behaviours or practices that result in poor outcomes for customers.

While these arrangements are typically subject to checks and balances to mitigate such risks, a number of banks told the Review they have scaled back over time the significance of product-related payments and strengthened the checks in place.

Some of the banks also told the Review of their intention to do more in this direction in 2017.

Other banks apparently advised the Review that their culture has been historically strongly service-oriented and that significant change is not required.

The Issues Paper says that the Review has tentatively identified some practices it considers the banks should change because of the risk they will encourage poor selling practices leading to poor customer outcomes. These poor practices include:

• accelerator-type payments as certain sales thresholds are met;

• incentive payments that depend on cross-sales (like add-on insurance);

• sales or cross-sales gateways that must be met before incentives become payable;

• complex schemes that run the risk of confusion being resolved by emphasising sales-related activities.

Significantly, many banks told the Review that a “sales culture” is deeply embedded in the DNA of their organisations.

Discretion is considered a useful tool for these incentive schemes, as the manager can draw on wider aspects than merely sales to determine the incentive outcome.

The Review also considers culture change programs and scaling back the significance attached to product sales in performance discussions and reward systems that might assist in ensuring appropriate cultural norms.

The next stage

Mr Sedgwick has identified seven sets of issues on which he would like further feedback from banks, key stakeholders and the general community. Some are intended to assist him to better understand the context in which rewards operate or to test views received. Others are more directly linked to matters on which he may later make findings.

Mr Sedgwick has said that these areas may not necessarily be the subject of a recommendation or finding in his final report simply because he is seeking related views. These areas are:

• The role of targets
• Does size of rewards or their structure matter most?
• Should bank obligations be strengthened?
• What is the difference between a ‘sales’ and a ‘service’ culture?
• What role might the remuneration arrangements applicable to very senior managers play in conditioning the behaviour of frontline staff?
• Issues specific to remuneration of third parties
• What is a poor customer outcome (and what is the link to agent remuneration)?

A copy of the Retail Remuneration Review Issues Paper can be found HERE

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