Retail Bank Incentive Schemes in Australia

Dennis Gentilin is the author of “The Origins of Ethical Failures” (Routledge, 2016) and the Founding Director of Human Systems Advisory.


Last week, Mr Stephen Sedgwick AO released the findings from his review into remuneration arrangements for retail banking staff in Australia (the final report can be downloaded here). The review is part of a broader program of work being undertaken by the Australian Bankers Association that is aiming to address the culture and conduct issues within the banking sector.

With this objective in mind, the review represents a significant (albeit small) step in the right direction. Although some may question whether Mr Sedgwick went far enough, he has squarely placed the ball in the banks’ court and left them under no illusions that change is needed.

As I stated in my response to the Issues Paper released by Mr Sedgwick in January, targets represent a conundrum for organisations. On the one hand, when coupled with incentives, they can lead to deleterious outcomes. On the other, they are proven to be an effective way to motivate performance. Finding the right balance is difficult. Mr Sedgwick has done a great job at walking the tightrope.

Most impressive are some of the recommendations made by Mr Sedgwick. He has clearly managed to cultivate a deep understanding of what is a very complex topic. There are three highlights for me.

First, his focus on culture, and the recognition that any changes to remuneration arrangements will be ineffective if they are not coupled with accompanying changes to the broader organisational system:

The performance management, remuneration and cultural frameworks are most effective when they are aligned. Misalignment can cause confusion, if not outcomes inconsistent with the organisation’s true intentions. My recommendations are therefore holistic, and not simply directed to remuneration in isolation.

Second, calling out the central role of leadership:

Effective leadership is key. Leaders drive culture. Whether they do it by accident or by design, and whether culture is set by those at the top of the organisation or by ‘local leaders’ in each work group, depends on the credibility, consistency and quality of the systems and governance senior leaders put in place.

Finally, the symbolism in some of his messaging:

However, some may prefer to continue to work in an environment that offers large potential upside to their remuneration and may choose to seek employment elsewhere. Others may leave because they do not find the new priorities conducive to suitably high performance on their part.

This is powerful. Like prospectors in a gold rush, many people have over the years joined the banking and finance industry for the promise of riches. To paraphrase one of the great quotes from John F Kennedy, they were asking “what can the banking industry do for me, rather than what can I do for the banking industry.” And the threat of “good people” leaving an institution has at times been used by some to stifle efforts to address the issues associated with existing remuneration practices. Mr Sedgwick has made it quite clear where he stands on this issue.

Now it’s over to the banks. Mr Sedgwick has provided them with a platform. Early signs are that they will embrace the review’s recommendations, both in letter and spirit. What will be more heartening is if some banks go further than what is required, sending a loud message that the days where profit takes precedence over principled conduct are numbered.

It will also be interesting to see whether there are flow on effects to incentive schemes of more senior staff. Although a review of remuneration arrangements for those sitting above retail bank staff was not in Mr Sedgwick’s terms of reference, it would send an adverse message to people within an institution if changes are isolated to a specific group. In any status hierarchy, people are very attune to unfair treatment.

But as I mentioned, this is a small step. If it is serious, the industry should consider extending this approach beyond retail banking. This is what proper self regulation would look like. Embracing transparency, admitting one’s shortcomings, and then demonstrating through their subsequent actions that ethical conduct and meeting community expectations are clearly prioritised. By embracing this wholeheartedly, the industry will over time make Government inquiries a redundant exercise.