1.3 Front line remuneration

Much of the evidence the Commission obtained about remuneration of front line staff related to the front line or ‘customerfacing’ staff in banks. Much of the discussion below is framed with that context in mind. But what is said applies to any financial services entity that provides products or services to consumers. And, as will become apparent, many of the problems with which I deal emerged most vividly in connection with the direct sale of life insurance products.[1]

Like senior executives, front line employees in banks, until recently, have typically been paid fixed and variable remuneration.

Front line variable remuneration has typically been awarded, at least in part, on the basis of financial metrics, which encourage the employee to sell products.

On its face, this is unsurprising. Banks are commercial enterprises. Why not encourage and reward sales? And focusing on sales or profits provides concrete, quantifiable measures of performance. What could be simpler or better?

There is a short and obvious answer. Focusing only on what is to be sold is not enough. How the employee does the job is at least as important as what the employee does.

How as well as what is important because it is not now, and cannot be, disputed that variable remuneration can pose ‘an unacceptable risk of promoting behaviour that is inconsistent with the interests of customers’.[2] Yet the focus on what continues.

In an example of this narrow focus, CBA CEO Mr Matthew Comyn described short-term variable remuneration as a way of ‘eliciting discretionary effort’ from front line staff, defining discretionary effort as the difference between what [staff] might have otherwise done … if they were paid a fixed remuneration, versus if they had at least a proportion of their remuneration’ that was variable.[3] Yet, when the expression ‘discretionary effort’ is unpacked, it is evident that it is used as a euphemism for selling the bank’s products.[4] And Mr Hartzer also provided some more concrete examples of the activities that Westpac sought to encourage by including financial metrics as part of a variable remuneration balanced scorecard for its staff: contributing to a net growth in deposits, a net growth in the number of customers and a net growth of loan balances.[5]

Of course, variable remuneration is not the only way to encourage desired behaviour. Banks can provide staff with positive feedback on their performance, encourage them to take pride in their work, encourage them to take satisfaction from assisting customers, give them additional responsibilities and offer them a promotion or a higher base salary.[6]

Nor is variable remuneration the only way to discourage poor behaviour, or to respond to poor behaviour.[7] Disapproval of the behaviour of front line staff can be demonstrated in many different ways, including withholding a promotion, removing some of their duties, or taking a range of disciplinary actions.[8]

In the end, as Mr Shayne Elliott, CEO of ANZ emphasised, ANZ’s ‘experience and research [has shown that] the most powerful tool’ to influence the conduct of staff is the influence exercised by a staff member’s manager.[9] And that is unsurprising. Good management of staff produces good outcomes for the business and for the customer.

The ends that entities are seeking to achieve through variable remuneration can be achieved through other means. Those other means are to be preferred, if they carry fewer intrinsic risks with them. And, as indicated by the evidence given by Mr Johanson, those other means may be no less effective. Mr Johanson explained that Bendigo had removed all sales-based incentives and commissions for front line staff more than 10 years before.[10] Those incentives and commissions had not been prevalent within the bank prior to that time.[11] When asked whether the lack of sales-based incentives and commissions had affected employees’ motivation to serve their customers, Mr Johanson said that it had not: the bank’s employees got their satisfaction from ‘being trusted’ and from customers ‘feeling [that] they’re doing a good job’.[12]

Ultimately, Mr Comyn said that he was ‘open-minded’ about removing variable remuneration for CBA’s front line staff.[13]

Banks have recently made, and are continuing to make, significant changes to the ways in which they remunerate front line staff.[14] Many of these changes appear to have been made in response to the recommendations contained in the Sedgwick Report, which I have discussed above.[15]

In my view, full implementation of the Sedgwick recommendations is an important first step towards improving front line remuneration practices. But implementation will only improve these practices if banks implement the Sedgwick recommendations both in letter and in spirit. To give just a few examples, as indicated in the Sedgwick Report, banks must give careful attention to the way in which they structure any balanced scorecard that is used to award variable remuneration. Any financial metrics must be capped at 33% or less by 2020, and any non-financial metrics must be genuinely non-financial (Mr Sedgwick gave the example of classifying particular metrics as ‘customer’ metrics when they were arguably financial in character).[16] Banks must ensure that, where their remuneration systems allow for discretion, that discretion is exercised consistently with the recommendations put forward by Mr Sedgwick.[17] And banks must avoid giving an unduly narrow meaning to particular terms within recommendations that are clearly intended to have some breadth (for example, the concept that banks are to ‘remove variable reward payments and campaign related incentives that are directly linked to sales or the achievement of sales targets’).[18]

But implementation of the Sedgwick recommendations is only the first step. As I have sought to emphasise above, banks must continue to give frequent and considered thought to how their variable remuneration systems are structured: to whether they are geared not only to what employees do but how they do it.

The evidence showed that a number of entities have taken, or are taking, these types of steps.

For example, in 2017, CBA removed financial metrics from the scorecard for its tellers.[19] Mr Comyn said that this decision was made after a ‘lot of work’ considering appropriate remuneration structures, and in the hope that it might improve customer outcomes.[20] Since removing these metrics, Mr Comyn had not observed a deterioration in tellers’ performance.[21] He considered that, if asked, his staff members would consistently say that they preferred an environment without financial metrics, because:[22]

there’s a very strong sense of [the] customer in our customer-facing teams, who actually take a lot of pride in doing a good job for their customers, and having their performance solely evaluated on their advocacy as opposed to an element of financial performance, I would say certainly for many … if not the majority, [that] would be their preference.

ANZ has also experimented with its remuneration structures. By early 2017, prior to the publication of the Sedgwick Report, ANZ had conducted what it termed a ‘test and learn trial’ in one of its retail banking districts over 15 months.[23] During the trial, staff had individual sales targets removed from their incentive plans, and customer-based metrics were added in their place.[24] Customers reported increased levels of satisfaction with their branch experience, and good levels of staff engagement were recorded.[25] However, ANZ recorded that overall sales figures declined and that the district ‘performed worse on sales than the average across the entire Australian branch network’.[26] From this trial, ANZ concluded that there was ‘a role for sales targets and that incentive plans that take into account “whole of role” performance through a balanced scorecard approach are likely to be optimal’.[27]

ANZ is now undertaking a broader project that is assessing whether ANZ’s reward structure – including its remuneration, performance management, recognition and benefits system – is properly aligned to ANZ’s purpose, culture and strategic direction.[28] The project covers the whole organisation, including front line staff.[29] Mr Elliott emphasised that the project is still being developed, and has not yet been approved,[30] but he said that ANZ expects to be able to implement any revised model in the financial year beginning 1 October 2019.[31]

Three key remuneration changes are being considered as part of ANZ’s project.[32] Two are significant for present purposes. The first is changing the staff remuneration mix, so that staff receive an increased proportion of fixed remuneration and a decreased proportion of variable remuneration.[33] Mr Elliott explained that this proposal was in part motivated by a concern that ANZ had ‘become too reliant on variable remuneration’.[34]

The second is changing the basis for allocating variable remuneration: ANZ is considering moving to a system in which at least a portion of variable remuneration is awarded based on a group, rather than individual, financial metric. Mr Elliott explained that ANZ had formed the view that ‘too many’ of its staff members had individual performance-based variable remuneration as part of their remuneration mix.[35] Mr Elliott suggested that individual performance-based variable remuneration was:[36]

flawed in an organisation like [ANZ’s] where we require far more collaboration and team work to achieve good outcomes than … the summation of an individual.

Mr Elliott indicated that he saw value in introducing variable remuneration that was largely based on group performance for ‘a broad range’ of staff members within ANZ, including call centre staff, branch staff, most operational staff, customer complaints staff and technology staff.[37]

As part of the project, ANZ has trialled a pilot program in 50 branches, in which staff members no longer have individual financial targets but contribute to collective branch targets.[38] The purpose of the program was to test the hypothesis that ‘having team financial targets [would] improve customer experience and banker experience, without adversely impacting business performance’.[39] All other performance metrics remained unchanged.[40]

Mr Elliott described the results of the pilot as ‘encouraging’.[41] Among other things, customers appeared to be ‘achieving better outcomes’ or having a ‘better experience’, there has been ‘no diminution in business performance’, and ANZ staff ‘say they prefer it’.[42] The feedback received from ANZ staff included that this system seemed to encourage better teamwork, better utilisation of staff members’ individual areas of expertise and better education between staff, resulting in a ‘more seamless experience’ for ANZ’s customers.[43] Mr Elliott accepted that ‘a large number of positives … have flowed from this pilot’ and that there have not been any ‘obvious drawbacks’.[44]

There are evident advantages, and no obvious disadvantages, in moving to this type of model. And there may be advantages, and no disadvantages, in moving to other models, such as models that increase the amount of fixed remuneration paid to staff and decrease variable remuneration, or that remove variable remuneration altogether. The point is that this work should continue. Entities must challenge assumptions about how they can and should encourage certain behaviours and discourage others. In the end, good management, at all levels, is the best and most effective way to obtain the best results.

Recommendation 5.4 – Remuneration of front line staff

All financial services entities should review at least once each year the design and implementation of their remuneration systems for front line staff to ensure that the design and implementation of those systems focus on not only on what staff do, but also how they do it.

Recommendation 5.5 – The Sedgwick Review

Banks should implement fully the recommendations of the Sedgwick Review.


[1] See, eg, the Select case study from the fourth round of hearings and the ClearView and Freedom case studies from the sixth round of hearings.

[2] Sedgwick Review, Report, i; Transcript, Matthew Comyn, 19 November 2018, 6535–6; Transcript, Brian Hartzer, 22 November 2018, 6868, 6872; Transcript, Andrew Thorburn, 26 November 2018, 7043; Transcript, Shayne Elliott, 28 November 2018, 7322.

[3] Transcript, Matthew Comyn, 19 November 2018, 6530–1.

[4] Transcript, Matthew Comyn, 19 November 2018, 6537.

[5] Transcript, Brian Hartzer, 22 November 2018, 6869.

[6] See, eg, Transcript, Matthew Comyn, 19 November 2018, 6532.

[7] Transcript, Matthew Comyn, 19 November 2018, 6535; Transcript, Shayne Elliott, 28 November 2018, 7322.

[8] Transcript, Matthew Comyn, 19 November 2018, 6535.

[9] Transcript, Shayne Elliott, 28 November 2018, 7322.

[10] Transcript, Robert Johanson, 29 November 2018, 7379.

[11] They had for a period been offered by a wealth business that the bank acquired: Transcript, Robert Johanson, 29 November 2018, 7379.

[12] Transcript, Robert Johanson, 29 November 2018, 7380.

[13] Transcript, Matthew Comyn, 19 November 2018, 6556.

[14] Transcript, Matthew Comyn, 19 November 2018, 6530, 6540; Transcript, Andrew Thorburn, 26 November 2018, 7045; Transcript, Shayne Elliott, 28 November 2018, 7316–20, 7322–3.

[15] Transcript, Matthew Comyn, 19 November 2018, 6540; Transcript, Brian Hartzer, 22 November 2018, 6868; Transcript, Andrew Thorburn, 26 November 2018, 7040–1, 7044; Transcript, Shayne Elliott, 28 November 2018, 7316.

[16] Sedgwick Review, Report, 8, note following Recommendation 3; FSRC, Interim Report, vol 1, 309–13.

[17] See, eg, Sedgwick Review, Report, 8, Recommendations 4 and 5 and note following Recommendation 5.

[18] Sedgwick Review, Report, 8, Recommendation 2 (emphasis in original).

[19] Transcript, Matthew Comyn, 19 November 2018, 6545–6; Exhibit 7.2, Witness statement of Matthew Comyn, 14 November 2018, 70 [253(e)].

[20] Transcript, Matthew Comyn, 19 November 2018, 6545.

[21] Transcript, Matthew Comyn, 19 November 2018, 6545, 6556.

[22] Transcript, Matthew Comyn, 19 November 2018, 6546.

[23] Transcript, Shayne Elliott, 28 November 2018, 7317; Exhibit 7.131, February 2017, ANZ Response to Sedgwick Issues Paper, 1 [6.1].

[24] Transcript, Shayne Elliott, 28 November 2018, 7317; Exhibit 7.131, February 2017, ANZ Response to Sedgwick Issues Paper, 1 [6.1].

[25] Transcript, Shayne Elliott, 28 November 2018, 7317; Exhibit 7.131, February 2017, ANZ Response to Sedgwick Issues Paper, 1 [6.1].

[26] Transcript, Shayne Elliott, 28 November 2018, 7317; Exhibit 7.131, February 2017, ANZ Response to Sedgwick Issues Paper, 1 [6.1].

[27] Transcript, Shayne Elliott, 28 November 2018, 7317; Exhibit 7.131, February 2017, ANZ Response to Sedgwick Issues Paper, 2 [6.1].

[28] Transcript, Shayne Elliott, 28 November 2018, 7319; Exhibit 7.132, 6 August 2018, Reimagining Reward Slide Pack, 4.

[29] Transcript, Shayne Elliott, 28 November 2018, 7319.

[30] Transcript, Shayne Elliott, 28 November 2018, 7319.

[31] Transcript, Shayne Elliott, 28 November 2018, 7320.

[32] Exhibit 7.132, 6 August 2018, Reimagining Reward Slide Pack, 9.

[33] Exhibit 7.132, 6 August 2018, Reimagining Reward Slide Pack, 9.

[34] Transcript, Shayne Elliott, 28 November 2018, 7320.

[35] Transcript, Shayne Elliott, 28 November 2018, 7320.

[36] Transcript, Shayne Elliott, 28 November 2018, 7320.

[37] Transcript, Shayne Elliott, 28 November 2018, 7321.

[38] Transcript, Shayne Elliott, 28 November 2018, 7322; Exhibit 7.133, August 2018, Simplifying Performance Management Pilot CCC Roll Out, 2.

[39] Transcript, Shayne Elliott, 28 November 2018, 7323; Exhibit 7.133, August 2018, Simplifying Performance Management Pilot CCC Roll Out, 2.

[40] Transcript, Shayne Elliott, 28 November 2018, 7323–4; Exhibit 7.133, August 2018, Simplifying Performance Management Pilot CCC Roll Out, 3.

[41] Transcript, Shayne Elliott, 28 November 2018, 7324.

[42] Transcript, Shayne Elliott, 28 November 2018, 7324; see also Exhibit 7.133, August 2018, Simplifying Performance Management Pilot CCC Roll Out, 2.

[43] Transcript, Shayne Elliott, 28 November 2018, 7325; see also Exhibit 7.133, August 2018, Simplifying Performance Management Pilot CCC Roll Out, 5.

[44] Transcript, Shayne Elliott, 28 November 2018, 7325.

96 thoughts on “1.3 Front line remuneration”

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