New research sheds light on banker pay

Variable remuneration such as bonuses are increasingly hard to justify while the current approach to applying the balanced scorecard to track performance have failed, according to new academic research.

“The Royal Commission has identified many examples of misconduct resulting in bad outcomes for customers and has refocused its attention on how remuneration practices influence behaviour,” Macquarie University’s Applied Finance Centre Associate Professor Elizabeth Sheedy said.

Indeed, on the first day of the final hearings in the royal commission, Commonwealth Bank CEO Matthew Comyn admitted that there was a link to variable remuneration and misconduct.

“Based on this study, my previous research, the research of other academics, and the case studies presented by the Royal Commission, it is becoming increasingly difficult to justify the use of variable remuneration in financial services,” Sheedy said.

Sheedy further highlighted the dearth of any other rigorous research to support the Balanced Scorecard.

“I hope industry leaders and regulators will seriously consider this issue as we continue to do research in this crucial area of performance measurement and remuneration,”

The Behaviour of Finance Professionals under the Balanced Scorecard study is part of ongoing Macquarie University research into the balanced scorecard and was supported by Deloitte Australia, the Insurance Council of Australia, the Australian and New Zealand Institute of Insurance and Finance, and the Financial Services Institute of Australasia.

The study was conducted under 'laboratory' conditions with 318 finance professionals from the participating industry bodies.

“We wanted to assess what is driving people not to comply. The core to this is the fundamental tension of the way businesses are run,” Sheedy said.

“On the one hand the finance profession has to generate profits but at the same time, these businesses need to comply with regulation. Sometimes in the short term, an organisation needs to reject the profit objective in order to comply with regulation.”

The balanced scorecard was introduced as a method to help organisations manage these competing objectives.

The aim of the study was to also better understand the usefulness of the balanced scorecard for ensuring compliance with company policies.

“It was designed to mimic the typical financial services setting, where employees are under pressure to complete transactions for the benefit of shareholders,” Sheedy said.  

“At times the aims of profit generation and compliance are in conflict, at least in the short-term; it is sometimes necessary to reject profitable opportunities to comply with company policy.”

Compliance and company policy

The study assessed how various remuneration structures affect compliance with company policy.

“The research focused specifically on how the balanced scorecard works to promote behaviour that is compliant with policy – a system that has come under scrutiny in the royal commission, Sheedy said.

According to the research, the highest rates (75 per cent) of compliance were achieved under a fixed remuneration structure, whereas compliance rates fell significantly (62 per cent) under a simplified balanced scorecard system.

Sheedy said the research showed under a compliance gateway, compliance rates fell further to 51 per cent of participants.

“Interestingly, the balanced scorecard we tested did not lead to any significant uplift in productivity relative to fixed remuneration,” Sheedy said.

“This may be because the decision to breach, or not breach policy, slows participants down as they weigh up the chance of being caught and possible consequences.”

Sheedy said measures to improve employee behaviour must go beyond remuneration.

“They must also consider issues such as moral identity and social standing, further slowing down the speed of mental processing.

“Under fixed remuneration, there is less need to consider such issues, and so the often-claimed loss in productivity is not observed”  

She also highlighted moral disengagement, a concept which helps justify people doing the wrong thing. For example, playing dirty is sometimes necessary in order to achieve noble ends, inflating one’s credential or the argument that people should not be held accountable for doing questionable things when they are just doing what an authority figure told them to do.

Research suggested that moral disengagement is a good predictor of unethical behaviour in the workplace.

Research into remuneration and culture by the academic began in 2017, this the second study.

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