Banking: The frontline war between targets and incentives
“The vast majority of bank staff want to do the best for their customers but can’t because they are under constant pressure to hit ever-demanding targets, which increase every year. A failure to hit those targets can result in staff being subject to performance improvement plans and in some cases being dismissed for under-performance. A number of management practices we have been dealing with are based more on humiliation than on positive motivation. Extreme pressure causes desperate people to do desperate things. In that kind of environment, it is surprising that there have been so few mis-selling scandals.” Affinity (2012), Written evidence to the Parliamentary Commission on Banking Standards
The archaic role of banks managing deposits and loans has long superseded its traditionalism. Modern banking practices no longer revolve around simple transaction and current accounts management. Nowadays, banking is more about selling than building relationships and managing risk.
If there was a certain amount of aristocracy to the banking environment in the past, there is practically no difference between a bank and a sales agency, in the present. The yearning for growth, has reduced the customer relationship and risk management dimensions of banking to such an extent, that it is rather hard to distinguish the financial rationality beyond the market share aggressiveness.
Although hard to pinpoint, there was a specific moment in time when banks shifted their cultural position. The customer centric strategy that banks once had, was abandoned for an increasing desire to measure and report on performance. However, the performance measurement process was somehow misunderstood. What banks did, was increase the pressure of growth on regional and branch managers, which therefore relieved more pressure onto frontline officers. Frontline employees were thereon introduced to “targets”.
Ask any bank consultant on the frontline about their job, and they will surely lessen it to “targets”. So will any sales representative. If a banking consultant’s job in the past relied more on financial modeling and risk analysis, it is no more than a sales oriented profession, in the present. The strategy at the top is no longer communicated to the employee at the bottom. The sole purpose of the banking consultant is to understand and achieve his ‘Target”, which is communicated and calibrated to the bank’s strategy.
Sales “Targets” are numbers on the individual evaluation sheet. Although, there is a minor similarity with the “targets” that we assign KPIs to, there is a certain misinterpretation to their purpose, as you might come to agree. “Targets” in the banking system are purely quantitative. There is no quality related measurement dimension to them. They are indeed linked to commission-based incentives, but there is a rather demotivating side to linking performance incentives to quantitative metrics. A typical sales incentives scheme, within a bank, assigns different targets or thresholds for each individual product requiring high sales. At the end of the month, a results analysis is performed to determine the overall level of the bonus received by the employee. Accountability for performance befalls each frontline banking sales employee, who are either pressured to improve ranking, are placed under performance review or are dismissed for under-performance. Frontline sales staff who do not meet their targets oftentimes see a substantial drop in remuneration and face the constant pressure of losing their jobs.
How is this inconsistent with healthy performance management practices?
- Target based cultures ultimately harm end customers: Facing the pressures of stretch targets, frontline bank employees no longer consider the need of the customers when selling the bank’s products. The sales process becomes one that is particularly set on persuasion. Although customers look for the best financial advice, bank consultants will be biased in recommending products which generate the highest commission or help them achieve their targets.
- Short-term profit increases the risk for financial instability: Incentive-based and bonus schemes will trigger an increase in sales. However, little emphasis on customer behavior analysis will ultimately deteriorate the quality of the bank’s portfolio. A low quality portfolio will produce more defaults on rates than healthy financial return. By focusing on targets and sales quotas, bank consultants will draw back on procedures, regulations and compliance issues. They will sell anything to anyone without regard to the bank they work for and the economic implications thereon.
- Inappropriate use of incentives to generate profit fuels a large array of bad practices: A bank culture that feeds on incentive-based sales, will come to promote irresponsible lending in order for employees to keep their jobs. Aggressive selling practices will distance the customer from financial help and advice. It builds mistrust among a bank and its clients. Customer advocacy will no longer work in favor of the bank, but in spite of it. As much as the bank might be able to sell on the short run, customers who value their banking relationships, will never come back.
- Quantitative assessments require a qualitative perspective: An unbalanced perspective on performance can have damaging effects on the long run. Evaluations that are based solely on quantitative KPIs will not provide a comprehensive image on performance. Quantitative assessments that do not reveal aspects related to quality, distort the rendition of strategy into action. Fed by inappropriate bonus programs, unilateral quantitative evaluations can lead to the collapse of entire systems.
- Financial provisions are considered sufficient to cover target-triggered misconduct: Banks are required to set aside capital to overcome potential losses. Oftentimes, they regard this reserve as a safety net or cushion that they can extensively rely on. However, is a financial safety net effective in the face of a financial crisis? The last financial crisis was the after-match of an irresponsible hands-off banking approach to stretch targets and chaotic selling. The sub-prime mortgage crisis in the US, the audacious selling strategies of English banks, as well as the mis-sellings of risky investment products in Australia, Spain and Hong Kong have all been costly side-effects of the retail banking hysteria, and none of the financial provisions set aside were able to cover the worldwide moral damage provoked.
Although with performance management systems target setting can be a charming storytelling, it should not be a matter of just theory. Thinking of profitability when setting targets does not necessarily lead to desired outcomes. If it comes to the point that stretch targets are necessary, they should be about human excellence and not solely about financial success.
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