Front-line remuneration – focusing on what is sold is not enough. How the employee does the job is at least as important as what the employee does.
How we incentivise and reward customer-facing staff is pivotal to company culture and customer outcomes. In many cases, variable remuneration arrangements incentivised behaviour that was adverse to customer interests.
The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry issued in February 2019 made several interesting findings and recommendations.
1. Board involvement
For banks, board involvement in front line remuneration is not a novel concept. Boards and CEOs should visibly and effectively oversee the implementation of these recommendations. This they should do for at least the next five years, and report publicly on how retail staff are remunerated and how their performance is assessed.
2. Commissions and product-based payments
As regards product sales commissions and product-based payments in retail banking in Australia, the following recommendations about remuneration structures for retail bank staff were made. See the Sedgwick Report issued in 2017 which concluded that:
- banks remove variable reward payments and campaign-related incentives that are directly linked to sales;
- eligibility to receive any variable reward payment should be based on an overall assessment against a range of factors. These should reflect the breadth of the responsibilities of each role; and
- variable reward payments should ultimately amount to a relatively small proportion of fixed pay.
3. Cultural ecosystem
It must be acknowledged that remuneration is not the only lever available to influence culture. Remuneration policy and practices sit within a broader cultural ecosystem that includes other people-focused processes, general governance policies and risk controls.
4. Incentivising customer-facing staff
Decide, document and communicate upfront the matters that will be taken into account. These could include alignment of behaviours to codes of conduct and company values and taking initiatives and owning outcomes – and who is accountable for decisions.
Consider how any metrics used to determine variable remuneration outcomes are chosen.
- A common customer-focused metric is linked to a company’s Net Promoter Score (NPS). This is a customer satisfaction metric that measures a customers’ willingness to return for another service as well as to make a recommendation to their family, friends or colleagues.
- A more nuanced metric, which looks at outcomes rather than just satisfaction, may be appropriate for some companies. For example, in the context of retail banking, one of the Sedgwick recommendations was that “all customer measures should be genuinely customer-centric and tailored to the role being assessed, and progressively reflect a focus on customer outcomes not just customer loyalty/satisfaction”.
Unlike executive remuneration, which is and remains at the forefront of investor and media attention for some decades, front-line remuneration was seldom seen or heard of, even here in South Africa. We should also move forward on front-line remuneration – focusing on what is sold is simply not enough.
A PDF version of this article is available here.