“People help the people
Nothing will drag you down”
— Birdy, “People Help the People”
Remuneration and Incentives
If you’re self-licensed, or starting down that path, you’ve no doubt read and absorbed Regulatory Guide 104 “Licensing: Meeting the general obligations”. This regulatory guide addresses compliance and risk management, monitoring and supervision, training and the technological and other resources needed to demonstrate compliance with your general obligations.
In our experience, it’s the ‘people’ element that seldom attracts the attention it deserves. Even those Licensees that invest in, and closely manage their finances and technology, often fail to adequately consider their people or the measures, processes and procedures that support their recruitment, development and ongoing management.
Large licensees, particularly institutional licensees, have formal procedures in place to address regulatory expectations and optimise productivity. Some even address staff well-being and professional development. However, while they’ve often been successful in aligning the interests of their staff with the Licensee’s interests, they have often done so at their clients’ expense.
“remuneration and incentives, especially variable remuneration programs tell staff what the entity rewards. Hence, remuneration and incentives tell staff what the entity values. Remuneration both affects and reflects culture. As the Commission’s work has shown, and is now not disputed, poor remuneration and incentive programs can lead, and have led, to poor customer outcomes.”
— Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 4 February 2019, p335
Most of us didn’t need the Royal Commission to identify that sales-focused cultures exacerbate conflicts, which, in turn, negatively affect advice quality and consumer outcomes. The Commissioner confirmed what many of us had already observed – licensee’s remuneration models, and the measures, processes and procedures implemented to manage and incentivise staff created a fundamental divergence between clients’ interests and the interests and duties of the clients’ advisers.
Professionalisation requires significant changes to management, structure, systems, processes, culture, education standards and remuneration.
However, these changes need to be balanced against commercial realities including that conflicts can never be entirely removed. Regardless of the Licensee’s business model, conflicts of interests and duties might only be effectively managed and mitigated through the adoption of a ‘balanced scorecard’ approach.
Understanding the balancing act
For clarity, a ‘Balanced Scorecard’ is a performance management mechanism that ties benefits and discretionary remuneration – such as bonuses – to a matrix of multiple, distinct and often competing responsibilities. The Balanced Scorecard model recognized the significant limitations caused by the singular focus on financial measures, and proposed an alternative that better aligns strategic and operational matter.
By balancing competing perspectives (customer, financial, internal and learning) Norton and Kaplan proposed a model that was seen to be more likely to better align interests, objectives and outcomes.
Although academic research suggests that ‘Balanced Scorecards’ are less effective in ensuring compliance than fixed remuneration models, they remain a widely used, and generally accepted, management tool. Part of their appeal may lie in the fact that a properly weighted balanced scorecard can allow Licensees to receive benefits that would otherwise be ‘conflicted remuneration’ and prohibited by s963L. The Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. Although they are generally applied to ‘sales’ and ‘advice’ staff, they have a broader utility when well-considered and consistently applied.
The Royal Commission highlighted that personal incentives should be based on a range of measures and that ‘sales’ should not be the principal determinant. Interestingly, it also suggested that staff should not be rewarded for complying with the law – compliance should be expected and not treated as discretionary effort. While it’s not reasonable to reward individuals for complying with the law, it is prudent, if not essential, to withhold personal incentives from those who do not comply (and claw-back paid incentives if misconduct is subsequently detected).
These factors suggest that now is the best time for Licensees to review their employment contracts and performance management systems.
The Regulators may exercise restraint in commenting on some commercial matters but their increasing focus on culture, remuneration and competency should herald a more direct focus on how licensees manage their people. While they are unlikely to lessen their focus on the monitoring and supervision of a licensee’s representatives, it would be prudent to anticipate a broader focus on your people. Compliance, in this respect, requires Licensees to invest in their employees, to communicate clearly, set expectations and provide feedback in the form of regular performance discussions and evaluations.