The Way We Were

29 June, 2011 by Alex Winchester

Compensation for sales people in financial services has come under significant public scrutiny since 2008, with many attention-grabbing media headlines throughout the financial crash focussing on the debatable moral and commercial foundations for bankers’ reward packages. This has resulted in substantial challenge to the old ways of rewarding sales people across the wider financial services industry – but why is this, and how should remuneration be adjusted?

How things used to work

In the old world, more sales revenue meant more pay – full stop. A low base salary for a sales person would be supplemented by large pay-outs from a performance-linked bonus scheme, driven by commission on simplistic revenue measures. However, this traditional approach has come under significant political and regulatory examination, and financial organisations themselves have realised that this model does not align with their long-term commercial goals. Incentivising revenue at any cost (numbers for numbers sake) can lead sales people to pursue transactions that:

  • Secure short-term commercial success at the expense of long-term profitability
  • Deliver weaker outcomes for the end-customer
  • Result in increased reputational, regulatory and commercial risk for their employer

As margins diminish and regulatory pressure grows, financial organisations have therefore realised that an overhaul of incentive schemes is urgently required.

So what does this mean? What new measures are being implemented into incentive schemes?

Firstly, the ratio of base salary to bonus is changing, with a significant shift towards higher base salaries and lower bonus schemes, reducing the incentives for risk-taking. The bonus schemes themselves are then also increasingly focussing around four key areas:

  • Customer outcomes: organisations are being tasked with the responsibility of securing stronger outcomes for their end-customer, regardless of whether the product is sold directly or through intermediated channels – and delivering this starts with the sales team.
  • Quality revenue: pure revenue metrics are being replaced by measures which assess profitability over the product lifecycle, reflecting associated risk. This helps refocus sales people on delivering long-term profitability.
  • Conduct & behaviours: the responsibility for selling the right product to the right customer at the right time is falling onto the sales person, so performance measures are increasingly assessing compliance with legal, process, and regulatory requirements
  • Strategic objectives: many organisations are refocussing reward around specific strategic objectives, which could be anything from focussing on new product lines to targeting specific customer segments to greater cross-selling

Reward schemes are also being restructured to reflect the relative priority of these assessment criteria, moving to a ‘balanced scorecard’ approach. The implications of this are significant – for example, sales people who fail to meet minimum risk and regulatory requirements may find themselves ineligible for bonus payments due for performance against commercial targets.

What does this mean for the sales organisation?

The metrics and measures featuring in revamped reward schemes reflect the rising significance of assessing behaviour and conduct alongside commercial metrics. This drives appropriate sales that are commercially beneficial over the long-term.

However, the main influence on behaviours and conduct is the culture of the organisation within which the sales people operate, and reward schemes are only one lever for influencing organisational culture. To truly deliver on shareholders’ and regulatory demands, organisations therefore need to transform their sales culture – which is a far greater challenge.