Banks on track with remuneration reform: Sedgwick

Stephen Sedgwick, a former public service commissioner who was tasked by the Australian Banking Association to conduct a review of remuneration in the retail banking industry, has concluded that banks are on track to meet their 2020 deadline to overhaul staff remuneration.

The first Sedgwick report, which was published in April 2017, presented 21 recommendations on remuneration structures and culture in retail banking, including:

• Banning variable reward payments and campaign-related incentives to retail bank staff that are directly related to sales or the achievement of sales targets
• Where incentives are paid, they should be based on a range of factors that reflect the breath of the responsibilities of each role, such as quality of service and customer outcomes
• Incentives paid should not be based on the type of product that is sold but rather on the time taken by staff to process an application for a customer
• Creating a workplace culture and leadership structure that focuses on the interests of customers

In an update report released this week, Mr Sedgwick observed that “substantial progress has been made to delink sales directly to reward for front-line staff”, including for home lenders.

He said that in 2018 four banks continued to measure variable remuneration based on at least one financial element of a scorecard in isolation from the other elements.

However, no bank “overly calculates in 2019 variable remuneration for retail staff solely by direct reference to an individual’s performance relative to their sales targets”.

Mr Sedgwick noted that more work is required to “minimise the risk that sellers will receive ‘mixed messages’ about the importance of sales”.

He stated in his report: “Managers are more likely to have branch or business unit financial targets. This is not inappropriate. The issue is how they communicate and translate these targets for those that report to them. During [Finance Sector Union] consultations, those present conveyed scepticism about how well front-line staff were insulated from the pressures managers face over targets.”

The Finance Sector Union mentioned in its submission to the royal commission that, despite the proportion of a staff’s performance metrics dedicated to sales targets has been reduced since the Sedgwick review, such targets had been “supplemented with ‘customer needs analysis’ processes. It referred to ‘A-Z Reviews’ at ANZ, where customers are quizzed as to their finances with a view to selling the customer as many products as possible”.

“From the perspective of the bank, a customer needs analysis process is an indirect measure of sales. The banks know that they will make more sales by causing more of these review processes to occur,” the union continued. 

While some feedback was provided by bank staff, Mr Sedgwick said a systematic assessment had not been conducted into how effectively the policy changes had been implemented, or the banks’ success in improving cultures.

“It is too early to assess how well bank practices and bank culture have changed to conform with the revised policy intent,” he wrote.

When it comes to mortgage broker remuneration, Mr Sedgwick concluded that the banking industry had only made “modest” changes, acknowledging that the debate on mortgage broker remuneration has intensified since the recommendation to redesign the commission model had been made in 2017. 

“There are now many contributions in the debate about the most appropriate payment arrangements for mortgage brokers. I can understand, therefore, that some in the industry may have been reluctant to take precipitate action before this public policy issue has been resolved,” Mr Sedgwick wrote in his update report.

“I understand also that some who may have preferred a fee-based model felt constrained in taking unilateral action (and the competition law precludes collusion), including fears that the first mover disadvantage could be significant while the industry adjusted.”

He advised that a further review of the implementation of the recommendations be conducted in 2021.

[Related: The biggest threat to the Australian mortgage industry]