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Simon Collins: Is your firm incentivising for the right reasons?

The FCA has its eye on staff performance strategies, so make sure risks are recognised and managed

In last month’s article, I considered the regulator’s focus on value for money. Business costs play a big part in value and this week I want to look at the costs of staff.

In a speech last year, FCA chief executive Andrew Bailey stated: “If culture is ignored, then an opportunity is lost to tackle one of the major root causes of conduct failures. The answer is not to try to tackle the culture, but to act on the many things that determine it, of which governance and remuneration are important.”

There is no point in the level of penalty for inappropriate actions being outweighed by the incentive that led to it in the first place

On that final point, the regulator has recently issued its policy statement (PS18/7) and final guidance (FG18/2) on staff incentives, remuneration and performance management.

Although requirements are aimed at the consumer credit sector and some of the risks identified, such as accelerator payments, may seem a little extreme compared to more regulatory mature areas of the industry, there are lessons that are transferable to other sectors. For example, there will likely be risks in firms where bonuses are up for grabs.

Simon Collins: FCA tightens grip on value for money

It is vital the issues associated with different staff management practices are recognised, managed and, where possible, mitigated. The new guidance provides some useful pointers as to how to approach this.

Strike a balance

The challenge is to ensure there is a balance between incentive and penalty, that the right actions or outcomes are incentivised and that the firm’s approach to remuneration is reviewed regularly. We have seen instances where remuneration schemes have been introduced but not reviewed following tweaks to business models and strategy.

There is no point in the level of penalty for inappropriate actions or results being outweighed by the incentive that led to the inappropriate action in the first place. This would be seen as offering a net profit for achieving the wrong outcomes.

How should advice firms pay their staff?

Equally, a draconian all-or-nothing penalty could disincentivise or create a barrier between incentivised and monitoring staff. A more enlightened approach would be to simply encourage good business quality, rather than focus on sales (or other incentivised activity) volumes.

Management’s role

Of course, while the incentive scheme features themselves will play a large role in the outcomes experienced by clients, the way in which staff are managed by supervisors will also have an impact.

Management practices and behaviours must be constantly reviewed to ensure there is no undue pressure on staff to achieve results at the expense of good client outcomes.

Techniques such as volume-based targets and the use of disciplinary action for failure to meet such targets have the potential to lead staff in the wrong direction. What is more, management time involved in poor performance issues is a significant drain, so you will want to get it right first time.

Should you sell your firm to your own staff?

A holistic approach is needed to devise, monitor and adapt adequate incentive schemes. This requires the right quality of staff at each stage of the process and, most importantly, the visible buy-in of the senior management team.

Culture has been described as what you do when no one is looking, and if the right messages are transmitted from senior staff throughout the incentive process, then the correct outcomes are likely to be achieved.

For those firms currently subject to the senior managers’ regime, the responsibility for client outcomes will fall within the remit of a senior manager. So for those joining the regime next year, taking the opportunity to revisit all guidelines in this area will be time well spent.

Simon Collins is managing director, regulatory, at Eversheds Sutherland

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