Photo Credit: NIck James Frost
*Correction: Wednesday November 29th
During the round 7 of the Royal Commission Commissioner Hayne Question CBA Chairman Catherine Livingstone.
Hayne said, “Scorecards present an aura of mathematical precision and calculation, is it not?”
He then asked:
“Going through this process, we see high a degree of specificity and high degree of detail at various stages, is that right?”
“That is correct,” Livingstone responded
“Does the degree of detail and specificity that is applied, in truth, serve to mask the lack of critical judgement about what really matters?”
“I think that’s correct, certainly at this point in terms of how the score card framework is applied. That’s the case now in terms of discussion that accompanies the scorecard both in terms of input form the other committees as well as the substance of the scorecard, it is one element, but at this point is the only element,” she confirmed.
The scorecard was making or failing to identify properly the criteria of importance, Livingstone said that this why they have much more comprehensive risk scorecard before they get to the financial scorecard.
Balanced-Scorecards in light of the Royal Commission
On a Tuesday morning last month, Professor Elizabeth Sheedy presented her findings on balanced scorecards, compliance gateway and fixed remuneration on how the incentives were related to conduct in the financial sector.
Sheedy’s team found that renumeration did have an impact on compliance, but actually have much of an impact on performance. This is based on a report titled Behaviours of Finance professional Under the Balanced Scorecard co-authored by Associate Professor Elizabeth Sheedy, Dr. Lyla Zhang and Dominik Stefan.
The research was supported by ANZIIF, FINSIA, Deloitte and the Insurance council of Australia.
She said that the concerned look at the problem of measuring compliance with the sense that compliance is not be perfectly measured by existing methods.
“Some years ago, the balance scorecard was proposed as a method of remuneration which was designed to help people balance the competing objectives but there seems to have been problems and it has not been an easy road,” Sheedy explained.
She continued that the original idea behind the balance scorecard sounds very sound, the only value of the balance scorecard was then to add additional criteria, but then this led to the challenges of their being too much criteria that they would have to comply with.
Measuring the behaviour and performance
“A lot of bad behaviour is not discovered, perhaps ever, or not many years,” Sheedy said.
In September of this year, they had more than 300 professionals come into a temporary lab created on the campus and they guaranteed that everyone would get $50 and there was the possibility was to earn up to $300.
They used the scorecard, fixed remuneration and the compliance gateway system.
The study found with fixed remuneration 75 per cent of people were compliant across all the transactions. under the compliance scorecard, compliance rates fell to 60 per cent and with the compliance gate way compliance rate further to 51 percent.
Sheedy said that if they took a broader view of compliance and with the caveat that people who had fewer than three breaches were still compliant then that to the figure to approximately 88 per cent.
She said that one of their findings that they found is that even under fixed remuneration they still did not achieve ‘perfect compliance’.
“Perhaps what this is indicating is that people are, even without bonuses, people feel quite a lot performance pressure to generate sales, and you could say that this is the culture of the environment, even when there is no personal incentive, they still feel that very strong pressure.”
More or Less productive?
Another focus of the study they looked at the impact of productivity on the remuneration system but found that there was little statistical difference when they looked at the completed compliant transactions. The average under the fixed remuneration system it was 19 and under the balanced scorecard it was 22.
She found this interesting since the purpose of incentives and bonuses is to increase productivity within the organisations.
This would suggest that incentives are not as effective previously assumed when it comes to generating sales, since means that it is not clear if that not the case after all.
Test before using
“I guess I would like throw out to industry how much it would have been if before implementing the balanced scorecard you had done your research before then, yeah check it out in lab conditions, its not that difficult to run this kind of lab experiment. And it seems like it really important thing to before you tale a new remuneration system out in the field that could affect people’s lives.”
Sheedy emphasised that she was not just talking abut the lives of employees but also other stakeholders, like customers.