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Managing the risk of unethical incentive plans in the Financial Services Industry

The financial industry is facing some major challenges which may impact its future success. A long history of ethical breaches has tarnished the industry’s reputation, making customers think twice about putting their savings and investments in the hands of certain financial institutions and exposing the risks created by incentive plans gone awry. Additionally, there is a push for transparency because the public wishes to hold companies accountable for their actions and decision-making.

The Ethical Challenge

Ethical issues in the financial industry are not new, but the creation of the internet and increased use of social media have made these issues far more visible than they were previously. Many of these ethical issues are caused by practices associated with sales incentives and stretch goals.

In the early 1990s, a retailer with an automotive repair division had a severely damaged reputation after some of its employees allegedly enticed customers into approving and paying for unnecessary repairs. To attempt restoration of its reputation, the retailer issued $46 million in coupons to entice customers back to its brand.

While the cost of these coupons may sound expensive, there are several examples in the financial industry of companies paying substantially more in fines. In 2005, an insurance broker paid $850 million in fines after accusations that it had received kickbacks from other companies for directing business their way.

Most recently, a large U.S. bank had to pay $185 million in fines and return an additional $5 million in fees wrongly charged to its customers. In this case, more than 5,000 employees allegedly opened over two million bank and credit card accounts without obtaining the permission of customers.

Reducing the Risk of Ethics Violations

In each of these examples, the ethical breach occurred when employees were enticed by large incentives and potentially impossible sales goals. These actions not only destroy the brand of the individual companies involved but also diminish the reputation of the financial industry overall.

To reduce the risk of these violations, companies need a combination of sales incentive transparency, an appropriate company culture and superior sales performance management. While many companies still manage goals and incentives with Excel spreadsheets or within the talent management modules of HRIS or ERP systems, these methods are not scalable and are no longer adequate to meet regulatory compliance requirements. Proper management of sales incentives and ethical risk for larger numbers of employees requires an enhanced sales incentive management system, with transparency and real-time reporting.

Encouraging sales and cross-selling

Encouraging employees to increase sales and to participate in cross-selling while remaining within ethical boundaries requires that these employees and their incentives be properly managed. One important aspect of this is to provide internal transparency regarding goals, incentives, and target attainment throughout the sales force and management.

This is sometimes easier said than done. For companies that operate in more than one country, sales plans can be complex due to different currencies, markets, regulations and economic circumstances. Using an enhanced compensation system manages this complexity, especially for sales managers with employees in multiple countries and multiple currencies.

Incentive systems that have regulatory compliance features can track the data needed to keep a company operating within ethical standards. This is particularly important for global companies that have to adhere to different sets of regulations in different geographies.

Closely watch sales goals and performance

The traditional quarterly update of sales performance for each employee doesn’t work in today’s world; closer oversight of sales performance relative to goals is required. Real-time data is optimal because it gives a company the opportunity to adjust sales targets to ensure they are realistically attainable. In the ethical violation examples shown above, a portion of the root cause of the problem was that employees viewed their sales targets as being unreachable and they may have feared losing their employment if their goals were unmet.

With real-time access to sales goals and performance, if external factors such as an economic decline in one region make some goals unrealistic, sales targets can be adjusted to keep employees motivated while aligning their behaviors with the company strategy and desired outcomes. Without this adjustment, employees can lose all hope of reaching their goals or become desperate to meet them. On the other hand, if the economy is showing greater growth than anticipated when goals were set, sales targets can also be adjusted upward. In this case, it is important to communicate to sales personnel why their targets have increased.

A robust sales incentive management system can provide reporting to quickly identify outliers who may be operating outside of the guidelines that have been established for the firms material risk takers.

Closing the gaps in the financial industry

The reputation of the financial services industry continues to face challenges because of its history of ethical breaches. A close watch on appropriate sales targets and each employee’s performance is now required to reduce the risk of ethical breaches and to ensure regulatory compliance. Real-time, internal transparency of sales performance and compensation information is key to setting realistic sales goals, delighting customers and protecting the reputation of the industry. 

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