Sales Compensation in Financial Services – a Fresh Look

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Presenter

• Brian Sinclair, Executive Director at Ernst & Young

• Leads EY’s Sales Compensation consulting practice

• Background highlights:

• Hewitt Associates: Global Sales Force Effectiveness Practice Leader

• Google: Director of Sales Compensation

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Agenda

• Sales compensation’s role in organizational effectiveness

• Financial services industry regulatory insights

• Incentive plan implications and risk indicators

• Assessing the effectiveness of a sales compensation plan

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Sales force effectiveness

This is a powerful lever, with potentially huge impact

Foster “smarter” time and territory management

Correlate expenses; link rewards to desired results

Attract competitive people with a sense of urgency

Retain successful salespeople

Motivate people to maximize selling effort

Focus attention on the most important goals

Communicate performance expectations very clearly

Why is sales compensation so important?

Because a good sales compensation plan can:

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Regulatory Insights Regulators have initiated or signaled their intent to examine sales practices in their institutions

The OCC is currently is performing sales practice reviews at all large and most mid-sized banks in its jurisdiction.

The objectives are to identify systemic or idiosyncratic issues pertaining to fraudulent sales practices and customer harm.

The OCC will perform additional supervisory work at individual institutions, as appropriate, based on the findings of its review.

Banks received letters setting out findings from Phase 1 and scopes for Phase 2. Findings on Phase 2 are expected in September 2017.

Findings/best practices from the horizontal review also to be shared.

The CFPB has taken enforcement action in multiple areas related to sales practices (for example, account opening and overdraft charges).

It is expected that the CFPB will leverage work performed by other regulators as appropriate.

On November 28 2016, the CFPB issued a bulletin warning that creating incentives for employees and service providers to meet sales and other business goals can lead to consumer harm if not properly managed. It highlighted these examples:

• Opening accounts without consent

• Misrepresenting benefits of products

• Steering customers towards less favorable products or terms

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Office of the Comptroller of the Currency (OCC)

Consumer Financial Protection Bureau (CFPB)

“If the incentive compensation schemes or sales targets are implemented in ways that threaten harm to consumers and lead to violations of the law, then banks and other financial companies will be held accountable.” – CFPB, September 2016

Federal Reserve

The Federal Reserve has stated it will be initiating a review and is linked to many OCC examinations.

As a result, banks that are not OCC regulated may still want to be prepared for Fed examinations in this space.

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Financial Services Industry Insights Issues common to many firms in relation to sales practices and treating customers fairly

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Multiple areas of firms are taking

action in response. Primary action

owner differs depending on firm.

Front office, Compliance or General

Counsel most often in the lead.

Retail business is the focus but

wealth management arms are also

being scrutinized.

Firms who have not yet

received letters from

regulators are still taking

action. They want to be prepared

for when the regulator arrives.

Actions being taken in response to regulatory insight

Insights on self-assessments undertaken

Actions and good practices from self-assessments

Reviews cover controls, practices,

policies and procedures.

Information being considered

includes complaints and

whistleblowing data as well

lookback at employees who have

been fired.

Looking at both direct and indirect

incentive compensation practices.

Some firms believe they have

avoided cross-selling problems by

not focusing on indicators such

new account openings.

Sales practice surveillance and testing

in independent areas.

Need for a single, comprehensive view

of whistleblowing that monitors that

whistleblowing is not penalized.

Create clear routes for senior

management review of information

from complaints.

Updating incentive compensation

schemes to incorporate customer

satisfaction and risk management.

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Incentive pay is a key focus of regulators Regulators are requiring enhanced alignment between incentives and risk management

2010 Final Guidance on Sound Incentive Compensation Policies within Banks

Banks subject to these rules are expected to maintain sales incentives that manage conduct risk

Requires incentive plans be specifically designed not to encourage excessive risk-taking, considering three principles:

Do not encourage excessive risk-taking beyond the organization’s ability to effectively identify and manage risk

Be compatible with effective risk controls and risk management

Be supported by the organization's board of directors.

OCC Phase 2 Scope

Focused on the relationship between sales practices and incentive compensation plans, including:

Incentives for account openings and sales referrals

Financial performance factors and thresholds

Sales crediting policies

Customer satisfaction as an incentive metric

Compliance and risk management-related factors

Also questioned organization’s monitoring of incentive compensation for risk indicators

Payout limitations

Management discretion

Supervisors' incentive pay tied to subordinate activity

Risk-adjusted measures

Business unit or individual goals

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Incentive plan design Scrutiny from regulators and customers is expected to increase

What incentive plans or features may encourage risky/questionable sales behavior?

Aggressive quotas (perceived by employees as unattainable through “normal” activity)

Excessive pay at risk

Excessive leverage for sales in excess of target (i.e., steep “ramping”)

Incentive “cliffs” (where one incremental sale has large incentive consequences)

Volume-only measures (unbalanced by quality or customer feedback metrics)

Weak sales crediting rules (e.g., credit for account openings, not usage)

What should be monitored to ensure that you are not subject to incentive plan risk?

Excessive number of new accounts, and particularly new accounts that remain dormant (e.g., unused)

A spike in sales activity in the last days of the incentive period

Aggressive sales targets that are met just barely, but consistently

Customer complaints, employee exit interviews, social media comments from employees or customers

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Incentive plan design (continued) Scrutiny from regulators and customers is expected to increase

Actionable takeaways: What actions should be taken to ensure our incentives are sound?

Inventory and examine current incentive compensation programs with consideration to the “flaws” on the previous

page

HR, Finance, Sales and Risk Management should collaborate to validate plan designs and confirm ongoing governance

and oversight

Modify incentive plans to align with risk objectives (e.g., introduce non-financial measures, sharpen sales crediting

rules, introduce enforceable disciplinary actions for misbehavior including incentive claw-backs)

Create and execute a training program to help employees understand the linkage between established firm risk

culture, their performance, and the consequences of non-compliance

Develop policies and procedures to support and periodically assess the incentive plans and related controls and

compliance

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Sales incentive risk indicators

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Changes in strategy (e.g., a change in customer segment focus, a new product

launch, an acquisition, etc.)

Poor overall sales performance

High percentages of missed quotas

Higher compensation costs than anticipated

High levels of confusion or misinterpretations in the field (typically a sign of plan

design complexity)

Frequent disputes over credits and payments (and a high percentage of those being

valid)

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Low levels of morale or motivation in the field (often corresponding to a lack of plan comprehension)

Lack of focus on the customers, products, and business outcomes (i.e., bundling, solution selling, etc.) that are driving

profits

Small pay differentials between high and low performers

Increased sales force turnover

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Characteristics of effective incentive plans

Successful incentive arrangements

► Built on clear objectives

► Uncomplicated (balance simplicity

with need to support strategy)

► “Line of sight” from efforts to results

to rewards

► Communicated clearly to all

participants

► Acceptable balance between

amount of risk and upside potential

Successful incentive environments

► Clear and well communicated

mission and roles

► Trusted and comprehensive

tracking systems

► Reasonably good goal setting

► Measurable or observable

performance measures

► Organized sales training and skill

development

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Assessing sales compensation effectiveness

Plan effectiveness assessment

Support for

business

objectives

Pay levels and

differentiation

Employee

perceptions

Technical

soundness

How has the plan performed in support of

program objectives (sales, profitability,

customer, HR, financial)?

Are the right levels of pay being earned for

different performance levels?

What are the employee perceptions of the

plan?

Is the plan technically sound and consistent

with prevailing leading practices?

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More about technical soundness

Considerations Complexity of the overall design

Appropriateness of the salary-incentive mix

Upside pay opportunity for excellence

Suitability and linkage of reward factors

Balance of commission and bonus formats

Balance of individual and team metrics

Appropriateness of thresholds and caps

Logic for tiers, ramps, accelerators, etc.

Pay-to-performance link

Alignment with sales manager pay plans

Alignment with other reward vehicles (i.e., recognition programs, contests, etc.)

Qualitative and quantitative data

collection

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Is the plan technically sound and consistent with market leading practices?

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A general sales compensation plan design approach

Benchmarking and Data Analysis

Objective- Setting

Conference

Project Kick-off/ Planning

Incentive Design

Meeting Cycle

Financial Modeling

Implementation and

Communication Planning

Field Input (Individual or

Group)

Executive Input

(Interviews)

Assess Prioritize Design Implement

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QUESTIONS?

Thank you for your participation!

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