Transparency is the watchword in the banking and insurance sectors, as regulations for the sector underscore the duty to advise and respect for customers’ needs. What impact does this have on incentive compensation for teams in the banking and insurance sectors?
Motivating commercial teams by incentivising them to respect customer interests: this is the objective set by new European regulations issued over the past few years, in the wake of the subprime mortgage crisis.
An objective for variable pay: transparency and duty to advise
Since the 2008 crisis, the European Commission has set out to regulate the way markets operate in order to improve the framework via which financial products are distributed.
Its two latest directives imply new conditions in terms of variable pay.
- The MiFID II directive on new regulations for financial markets will officially become law in January 2018.
- The Insurance Distribution Directive (IDD), also coming into force in 2018, focuses primarily on the activities of insurers.
Together, these directives provide a framework for variable pay in the banking and insurance sectors.
The IDD Directive in particular asks insurance companies to address a number of knotty issues such as compensation methods, professional training, the duty to advise and the management of conflicts of interest. In addition, there are obligations in terms of monitoring and governance for insurance products, and the establishment of a pre-contractual information document designed to inform the client of the principal characteristics of non-life insurance products.
Both of these directives stress the fact that compensation for sales forces must first and foremost be transparent, and should not constitute a conflict of interest. Clearly, the objective is to avoid any form of compensation that could lead the sales agent to sell products and services which do not meet the client’s needs or their investor profile.
As a reminder, life insurance distributors usually give sales agents an incentive to sell units of account (shares, ETFs, etc.) whose annual dividends are high earners for the insurer, rather than Euro bond funds (held by the insurer and backed by a capital guarantee), whose yield rates are historically low and present a disadvantage for the insurer (as guaranteeing these funds tends to eat into the company’s overall capital to a significant extent).
These regulations have brought in deep-rooted modifications in terms of variable pay in the banking and insurance sectors. Two trends have emerged as a result: the disappearance of commission for a single transaction, and the introduction of quality controls. The objective: hammering home the company’s duty to advise its customers. This underscores the advantage of using qualitative bonuses in order to reward an advisory approach and compliance with new regulations.
Phasing out single-transaction commissions
The banking sector was the first to implement the new regulations, with the insurance sector naturally following suit. The trend of phasing out commission within the variable pay scheme has been in motion for several years. Slowly but surely, this type of variable pay is disappearing due to the regulatory background created by these two directives.
The type of compensation awarded to the sales advisor should not damage commercial relations with the client. It is essential that the client makes their choice with full knowledge of what they’re purchasing, and this requires a thorough analysis of their needs ahead of the sales phase. Sales forces need to be able to offer customers a product that meets their specific needs, while also respecting their risk liability and the investment horizon. Variable pay should motivate sales staff in this direction.
This means using calculation methods for variable pay that allow you to avoid any misconduct that might arise as a result of sales staff chasing commissions. Previously, sales advisers were focusing on shifting the products that earned them the largest amount of commission.
Most banks, and a vast majority of insurers, have now integrated new parameters in this regard, getting rid of single-transaction commissions and replacing them with qualitative and quantitative target bonuses. Some institutions choose to break this down by product typology, others by type of client needs and still others by taking a broad measurement of “margins produced” across total sales. Finally, the notion of collective bonuses is now coming into its own, particularly in the banking industry, and in certain cases has the capacity to revitalise individual performances.
Towards quality bonuses
Banking and insurance are the only business sectors in which qualitative bonuses will be making up a greater and greater part of variable pay schemes.
This will require, for example, sales agents to possess sufficient knowledge of their clients, and to ensure that their profile information is accurate and that their appetite for risk has been correctly evaluated. They must be capable of evaluating their clients’ needs, and offering products that suit these needs.
Not only will the calculation of variable pay schemes be in conflict with the client’s interests, but in addition the transparency obligation in the IDD directive requires that sales agents explain to their clients how they are paid. Of course, this does not mean revealing the amounts involved, but rather explaining how their salary is calculated.
A qualitative target bonus enables firms to augment their commercial performance by establishing check points that will allow managers to assess their employees’ quality performance. The primary objective is to encourage the sales agent to follow a path that will lead towards improved performance.
Seek advice from our experts in variable pay and benefit from assistance in the implementation of your variable pay scheme, while taking into account issues which are specific to your sector.
