Punish Bad Behavior?

In an article (subscription required) by Corrie Driebusch, posted in the Risk and Compliance Journal section of the Wall Street Journal on February 12, 2014, a new compensation model at Barclays Advisers is discussed. Barclays Advisers’ New Performance Metric: Their Behavior: Bank Could Dock Compensation in U.S. Wealth-Management Unit for Misconduct. Compensation can now be reduced for misconduct.

I applaud Barclays for taking a stand that conduct does matter. However, I am a strong believer that carrots generally work better than sticks. In my experience, positive incentives are simply more effective than negative consequences for actually making behavioral changes. I would have recommended that compensation be higher based on good conduct rather than being reduced for bad.

“The change is a small part of a global reshaping of London-based Barclays’s business and practices, with the aim of polishing a reputation tainted in recent years by scandals, including involvement in efforts to rig benchmark interest rates and improper sales of insurance and other financial products. It also follows regulatory and internal criticism of the U.S. wealth-management unit’s culture for allegedly putting boosting profits ahead of following the rules.”

While Barclays says the change has been well received by its advisers, it seems hard to imagine that it would be. Imagine the difference if these advisers had been told they had the chance to make more by following the best practices for sales, particularly with vulnerable consumers. That type of incentive seems much more likely to improve morale and result in those sought after sales practices. In addition, some advisers who might be at more risk for reductions in their pay due to their poor conduct in the field may leave Barclays and show up at another firm. That means the overall risk of misconduct in the industry doesn’t change, even if there is a bit of a clean up at Barclays.

The article concludes “Deep pay cuts for anything less than serious misconduct wouldn’t make sense, Mr. Smith [an analyst at research firm Cerulli Associates] said. ‘I don’t think anyone’s going to be docked 20% of their pay because grandma had a complaint.’” That may be true, but if it is, how successful will the change in compensation be? And if pay isn’t docked in some significant way “because grandma had a complaint” does the policy do any real good for Barclays, in its apparent attempt to show a culture of compliance that is reflected in its compensation program? If having a year with no complaints (from grandma or otherwise) meant a bonus, those advisers might be very interested in treating each and every grandma the way they would want their own grandma treated. And that would create a culture of compliance that could make a real difference.

Only time will tell what this change in compensation means for sales practices at Barclays. I hope it succeeds, but I suspect that it will have only a marginal impact. Perhaps others looking at the same issues will decide to pursue a carrot approach and reward those who demonstrate a real commitment to best practices. That is what I hope to see.