Global Financial Services Conference

Transcription

1 Global Financial Services Conference Is there a future for sales incentives in financial services? Ron Burke, Director Sales Effectiveness & Rewards Towers Watson Thursday 16 May Towers Watson. All rights reserved.

2 Discussion topics Why do we have sales incentives? What risks do they create? What new risks are current changes creating? What can we do about it? 2

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4 The good news: Sales incentives can drive business results Sales incentives do drive behaviours The right behaviour improves business results Recent research shows a link between certain features and improved business performance, for example: The use of accelerators (referred to by the authors as overachievement compensation) drove over 13% higher revenues & 2% higher profit than models that did not include accelerators. The use of quarterly quota is preferred to annual quota and results in 5% higher revenue in the model. *Chung, Doug J., Thomas Steenburgh, and K. Sudhir. "Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans." Harvard Business School Working Paper, No , January

5 The bad news: Sales incentives can create risk Sales incentives do drive behaviours The wrong behaviour can damage the business British banks have so far shelled out almost 9bn to deal with customers seeking compensation following the alleged mis-selling of insurance policies for mortgage, loan and credit card products Telegraph Aug 2012 Energy company has been fined 1.25m for allowing its doorstep salesmen to mislead customers into thinking they would get a better energy deal Telegraph May 2012 Pharma overtakes arms industry to top the league of misbehaviour Guardian July 2012 ABC s $3bn fine for mis-selling drugs in the US is the biggest ever handed down Guardian July 2012 this is just the latest in a long series of DoJ findings against drug manufacturers for misleading or bribing their customers they have between them paid $6.7 billion of fines in recent years Spectator July

6 Let s call the whole thing off? 6

7 It is true that some leading organisations have no sales incentives John Lewis Proctor & Gamble Apple USAA Common characteristics Very strong corporate cultures Strong emphasis on personal development, training and coaching Disciplined performance management Often have some very unique distinguishing characteristic a unique ownership model, business model, target market, and/or unique products 7

8 Well designed incentive plans focus, motivate, and engage talent Incentive compensation objectives Attract and retain Focus effort Motivate performance In turn, positive impacts on customer experience more continuity More positive customer experience, higher satisfaction levels Higher employee retention Better employee engagement Higher recurring revenue, better business results Outcome of Well-Designed Plans Higher customer retention Higher product utilisation Deeper relationships/ more cross sell activity But, they also create risk (even well designed plans) 8

9 Let s be realistic about incentives Incentives can t be used to control risk Incentives Risk Incentives Risk Management Risk Rather, incentives may create risk, which needs to be controlled through other means Governance Clearly defined sales and customer management processes and policies Culture 9

10 The main types of incentive plan risk Reputational risk Risks to the firm s external and internal reputation (public perception 1 and employee perception/engagement) 2 Financial risk Risks associated with the financial performance of the organisation Operational risk Risks associated with the operational and administrative procedures of 3 the particular industry Regulatory / Compliance risk Risks associated with the need to comply with the rules and regulations 4 of the government Conduct risk Risk stemming from salesperson behaviours and/or actions that do not 5 align with clients' risk tolerance or organisational values and culture 10

11 Assessing incentive plan risk We look at a variety of related factors Risk Scorecard Categories Incentive Design Strategic Alignment & Goal Setting Risk Score Modifiers Risk Assessment Pay Opportunity Sales Process Monitoring Administrative X Business Characteristics Incentive Characteristics & Volatility A formal risk assessment is a critical tool to help diagnose potential issues, create action plans, and prioritise efforts 11

12 Sales incentive risk according to the FCA Disproportionate rewards for marginal sales Qualifiers or other inappropriate requirements Accelerators 100% variable pay, no salary Inappropriate product bias Large incentives to cross-sell or up-sell Variable salaries Thresholds Incentives linked size of the sale or term length Competitions and promotions Emphasising quality Claw back Capped or decreasing incentives Deferral of incentive payments Rolling target thresholds Balanced scorecards Practices that significantly increase the risk of mis-selling Practices that increase the risk of mis-selling Practices that might reduce the risk of mis-selling Underpinning all of this is an increased concern in particular about governance But, these are not the ONLY risks posed by sales incentives... 12

13 Risk #1 : Lack of financial alignment Year 1 Year 2 Year 3 Year 4 Revenue Incentive Cost Indexed to 100 for year 1 revenue and costs Chart is from an actual bank in the past At the time, they were: Placing heavy weight on customer satisfaction Only financial link was to account balances (total balances) for the branch No individual focus, no sales focus Similar risks exist today Decrease in weight on sales metrics Increase on service, quality, compliance etc. Decrease in motivational aspects of design (less upside, less differentiation, increased use of caps, etc.) Any one of these changes in isolation may be sensible Important to understand the broader behavioural and financial impact 13

14 Risk #2: Paying sales incentives to the wrong jobs Not Eligible Eligibility criteria Eligible 0% Time spent directly in the sales process* 100% Low Extent to which employee persuades customer in buying decisions High No Extent to which sales results are appropriate as the primary measure of performance Yes Support relationship via team Ownership of specific customer or territory relationships High sole owner * Generating and qualifying leads, pursuing leads, and/or closing the sale How many jobs on sales incentives realistically meet these criteria? 14

15 Risk #3: Ill-equipped sales managers Rule #1 of sales compensation You can t pay for everything that the job needs to do Why? Overcomplicates the plan Can t measure everything with the required degree of rigour That s what sales managers are for Risk Inexperienced sales managers with under-developed managerial skills Over-rely on the sales incentive plan to manage for them Neglect to use other tools at their disposal to manage performance Focus too much on short-term sales, not enough on longer-term impact (customer and business impact) 15

16 Risk #4: Over-emphasising pay (as the problem or the solution) Performance Management Career Progression/ Promotion Rewards Base Pay and Incentive Compensation Employee Performance Job Activities and Competencies Coaching/ Training An integrated approach Most sales organisations overemphasise the pay element of the reward equation The other elements are especially crucial when dealing with advice-based service and sales Key outcomes Reviewed other management tools, overhauled performance management system and career progression Eliminated use of referral incentives for service roles Used recognition and career progression as the core reward elements for sales by service roles 16

17 Sales compensation can t do the job all by itself! Top performing sales forces consider the entire spectrum of how talent is managed in order to drive engagement 17

18 There is a marked difference in how employees in best in class companies view their roles TYPICAL PRACTICE I need to do X, Y and Z Because I will make a larger bonus BEST IN CLASS PRACTICE I can contribute to the company s success By doing X, Y and Z And will share in the success by virtue of the bonus it will generate Best in class organisations accomplish this by... Using incentive performance measures that: The individual can directly impact and influence, AND Have a measurable impact on financial business results Having clear and proactive communication of: Strategic business priorities The customer s priorities Individuals roles in driving those priorities How compensation supports these priorities Deploying learning and development programmes that promote business literacy at all levels of the organisation 18

19 In conclusion Yes, there is a role for sales incentives But have to be smart about how and where they are used Importance of aligning with roles Much of the industry s trouble stems from using sales incentives for non-sales jobs Retail service roles or hybrid sales/service roles Sales incentives can do more than just pay for production But they need to have some link to financial sales results Otherwise, don t waste time with an overcomplicated customised plan You can t use the incentive plan to pay for everything the job needs to do Has always been true, but now more than ever Not just about safety, but also prevention! 19

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