Abolishing financial incentives for frontline staff has created an “unlevel playing field” between frontline bank staff and mortgage brokers in the UK, the CEO of Commonwealth Bank has told the Hayne royal commission.
Testifying at the start of the seventh round of royal commission hearings, the chief executive of the Commonwealth Bank of Australia (CBA), Matt Comyn, suggested that short-term variable remuneration has a competitive effect in that it “elicits discretionary effort” by frontline bank staff, subsequently improving their performance and helping create “an even playing field” for financial institutions and intermediaries such as mortgage brokers.
The CEO referred to major banks in the United Kingdom that had removed their short-term variable rewards for frontline staff, resulting in the broker channel gaining greater significant market share and the banks having to shut down their branches.
“What occurred was, broadly, 55 per cent of mortgages that were being originated in the UK through brokers then went to, the last time I was there, about 75 per cent. And that is a problem for a number of different reasons, not just withstanding, perhaps quality, perhaps risk metrics, but there are second and third order effects from that,” Mr Comyn told senior counsel assisting the royal commission Rowena Orr.
“I say that because the origination of mortgages fundamentally underpins the economics of things like the branch network. If you look into the UK, you will see that all of the major banks there are shutting branches because, in effect, what is happening is more and more of their customers are dealing with intermediaries, which is putting more financial pressure on their branch network.
“So, I would be conscious of an even playing field across the financial institutions, and key intermediaries such as mortgage brokers. Those sorts of concerns would not exist for many other roles.”
The chief executive also referred to one of the best-performing frontline staff members at a particular home lender in the UK who reportedly admitted to Mr Comyn that since the removal of short-term variable rewards, she works “30 per cent less” in terms of selling as well as other tasks.
“What they were in effect paid was 98.6 per cent of their prior year’s fixed remuneration... When I asked her about whether she still works the same [and] what has changed, her answer was simply, ‘I probably work 30 per cent less... [Her view was that], I’m basically getting paid the same as what I was previously… and I’m doing 30 per cent less work’,” Mr Comyn said.
As such, according to the CBA chief executive, having an element of remuneration that is not fixed motivates staff to do their best in whichever way they are measured. He added that the major bank is increasingly focusing on customer outcomes.
“In the example of the teller in a branch environment, all of their performance is evaluated on customer advocacy or Net Promoter Score, so we want to ensure that we're setting an environment where people are striving to do their best and to ensure that their performance is balanced and appropriate,” the CEO said.
“Clearly, the design of the performance management systems [and] routines are very important in terms of ensuring that we do not drive perverse outcomes from either incentive design or financial motivation.”
The CEO admitted, however, that removing incentives for branch tellers did not negatively impact their performance.