Executive briefing – December 2021

EBA report on application of remuneration guidelines for sales staff

We have prepared a short pre-Christmas briefing on the pay of sales staff within the banking sector. We also wanted to take this opportunity to wish all our readers a happy and restful Christmas. We will be back with further executive reward briefings in 2022.

Earlier this month, the EBA published a report that assesses the application of the 2016 EBA guidelines on the remuneration of sales staff at retail banks. The report is based on a survey carried out amongst a sample of 70 financial institutions from 12 EU member states. Post-Brexit, the report is not directly relevant to UK firms but, we think, it provides some useful observations, not only for UK retail banks, but for any financial services businesses that operate, or are considering operating, variable sales incentive structures.

The survey analysis revealed that financial institutions tend to “focus more on prudential requirements and commercial interests than on consumer protection requirements”. The EBA also noted a concern that “in terms of governance structures, the design, approval and monitoring of the remuneration policies and practices are often handled by the same function, which gives rise to the risk of an inaction bias”.

The report helpfully sets out a list of 17 ‘distinct good practices’ that were identified in the course of the survey; we have chosen the most noteworthy items from this list, as follows:

• Ensure that payout curves for variable remuneration do not set incentives to maximise sales at a specific point, e.g. by using a linear payout curve.
• Implement measures that explicitly disincentivise sales staff from acting in a way that gives rise to consumer detriment, e.g. requiring minimum ‘customer satisfaction’ outcomes before any variable remuneration becomes payable.
• Establish a ‘gatekeeper provision’, i.e. reduce or forfeit variable remuneration when the recipient is not compliant with regulatory requirements or acted to the consumer’s detriment.
• Apply dedicated tools in order to monitor conflicts of interest and residual risk from remuneration policies and practices, such as mystery shopping by the institutions themselves, targeted reviews of sales staffs’ compliance, additional training for sales staff and whistleblowing.
• When reviewing remuneration policies and practices, involve the internal control functions and ensure their independence, to avoid inaction bias.
• Apply a mix of quantitative and qualitative criteria when determining the variable remuneration for sales staff and ensure that the weight for the sales performance as part of the overall key performance indicators is well below 100%.
• Involve the shareholders’ meeting when granting variable remuneration in excess of 100% of fixed remuneration.

The full list of good practices is set out in the report.

FIT comment: A number of these features have already been implemented by many companies but represent a useful reminder of good practice.  Many banks have consolidated their bespoke sales incentives plans into the general bonus pool to address these points, although a number still remain.  Sales incentive arrangements need careful thought to address these points and protect against customer detriment by ensuring that staff retain such needs at the forefront of their thinking. The ‘good practices’ identified in the report should arguably be a matter of standard practice for any business utilising a variable sale incentive arrangement.

Interestingly, the EBA encourages firms to seek shareholder approval before variable remuneration is granted in excess of 100% of fixed remuneration. This threshold was not specified in the original 2016 guidelines (which simply referred to an “appropriate balance”) but does reflect the substance of the CRD banking regime and the infamous ‘bankers bonus cap’ for MRTs. That limit is not generally applicable to non-banking businesses but it arguably serves as a relevant quantitative yardstick that remuneration committees/ reward functions should bear in mind during the design phase and, even if not seeking shareholder consent, the fact that the EBA has flagged it indicates the seriousness with which it should be considered.  

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. 

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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