- Using balanced scorecards to set performance-based remuneration has become an article of faith in the financial services sector.
- A study of 318 participants found a significant drop in compliance rates when individuals were working under a balanced scorecard system.
- Evidence before the Hayne Royal Commission supports the finding that performance-linked remuneration can lead to misbehaviour.
By Leo D’Angelo Fisher
When more than 300 banking and finance professionals were lab-tested to see how having their performance evaluated via a ‘balanced scorecard’ influenced their decisions, the results were grim.
Researchers, led by Professor Elizabeth Sheedy at Macquarie University’s Macquarie Applied Finance Centre, ran an experimental study to investigate the effectiveness of the popular performance-measurement system. It found that using balanced scorecards to link remuneration to compliance and behavioural outcomes was “not as robust” as previously believed.
Since being popularised in the US by accounting academic Robert Kaplan and management consultant David Norton in the 1990s, the use of balanced scorecards to set performance-based remuneration has become an article of faith in the corporate sector. The system for deciding bonuses is particularly entrenched within the banking and financial services sector.
Balanced scorecards are typically used when employees are expected to complete multiple, competing tasks. In a financial institution, employees may be expected to generate sales/profits while also complying with company policy, such as policies designed to limit credit, underwriting, market and operational risks.
Balanced scorecards = compliance rate fall
The study’s 318 participants were finance professionals who took part in an “experimental laboratory” designed to simulate a typical financial services setting; they were under pressure to complete up to 60 transactions in sessions lasting 20 minutes. Many of the transactions would result in a breach of policy if completed.
The researchers found that the highest rates of compliance (75%) were achieved by professionals on fixed remuneration, whereas compliance rates fell significantly (62%) under a balanced scorecard system.
Those looking for real-world evidence to support the academic findings, says Sheedy, need look no further than the damning customer testimony before Australia’s banking Royal Commission.
“It is becoming increasingly difficult to justify the use of variable remuneration in financial services,” she says. “I hope industry leaders and regulators will seriously consider this issue as we continue to do research in this crucial area of performance measurement and remuneration.”
“The balanced scorecard has become such a sacred cow of the finance industry that it’s going to be quite difficult to give it away.”
How remuneration drives bad behaviour
But Sheedy admits change won’t come easily. “The balanced scorecard has become such a sacred cow of the finance industry that it’s going to be quite difficult to give it away,” she says. She suspects the industry will act only if forced to by regulators.
The Hayne Royal Commission’s interim report notes how performance-linked remuneration practices, including use of the balanced scorecard, influences behaviour. In cases of misconduct resulting in bad customer outcomes, the interim report observes that “the culture and conduct of the banks was driven by, and was reflected in, their remuneration practices and policies”.
Sheedy warns that banks are using balance scorecards “with little or no evidence” and says more research into its application is essential.
The study, Behaviour of Finance Professionals under the Balanced Scorecard, was supported by Deloitte Australia and the Insurance Council of Australia.