Incentives are meant to drive employee performance and benefit an organisation, but in practice they can lead to unethical and even corrupt behaviour. Incidents like the Wells Fargo sales scandal and ongoing debates about the “bonus culture” in investment banking show that financial services firms are particularly vulnerable to fall-out from poor incentives, with serious consequences in the form of fines, heightened regulatory scrutiny and loss of consumer confidence.

This year, Transparency International UK sponsored a Business Project at the London School of Economics. We challenged a group of five students* on the Master’s in International Management programme to come up with practical solutions to the problems of incentives in the financial services (FS) sector.

We asked the students to assess the situation in the FS industry and find out:

• What is being done to address the problem?
• What issues are not being addressed?
•  What more can FS firms do?

Over a period of three months, the students conducted desk research and field interviews with bankers, industry experts and compliance and HR practitioners and came up with a set of key recommendations.

These recommendations focus not only on incentives, but on the wider cultural issues that can lead incentives to go wrong.

Frame it positively

• Promote positive behaviour using inspirational examples and a reward system designed to fuel intrinsic motivation.

Focus incentives

• Take the pressure off employees by reducing variable pay, reducing the scope for a single action to trigger a reward and reducing the number of metrics in favour of a few critical measures.

Humanise relationships

• Foster personal employee-client relationships, encourage employees to consider others’ interests, and recognise individual ethical accomplishments.

To help companies implement these recommendations, the students created a tool called the “Ethical GPS”.

The tool consists of three elements:

The Compass focuses employees and managers’ attention on ethical issues, making sure they can orientate themselves and recognise potential ethical dilemmas. It consists of three components:

• Cardinal points: Employees and line managers assess upcoming projects/periods reflecting on potential ethical issues that might arise.
• Ethical logbook: Develop a database of past ethical issues and their solutions and use it to address new situations.
• Stakeholder map: Identify key stakeholders and their interests for all projects, and involve them in the project through a feedback/review system.

The Lighthouse provides employees with the information they need to navigate ethical issues and set on the right course of action.

• Lighthouse keeper: Assign ethical mentors or “buddies” to every member of staff to discuss ethical issues before, during and after each project/period.
• Ethical beam: Buddies assess the ethical engagement of their mentees. This can be included in appraisals.
• Rotation: Rotate buddies periodically to ensure a fair assessment and prevent the emergence of internal factions and alliances.

The Stars guide employees towards positive and effective behaviours.

• Personal track record: Personal ethics track records are physically displayed in the office and virtually available on the company’s intranet.
• Constellations: Positive examples of successfully resolved ethical issues are shared weekly. These serve as inspiration and to stimulate discussion.
• Northern star: Look for best practices from among peers and in other industries. With some adaptation, they can bring fresh perspectives and approaches.

The value of the Ethical GPS lies in its focus on fostering an ethical culture. A clear “tone” is set by the company leadership and an effort is made to embed ethical considerations in employees’ day-to-day work. The tool also grants “status” to employees who act with integrity, and seeks to avoid insularity or “group-think” by encouraging people to learn from other companies and industries.

Together with practical steps to align incentives schemes with company values and desired behaviours, it could be a valuable tool for firms in FS and beyond looking to drive real cultural change.

We at TI-UK value this type of project and encourage business students and trainee professionals, as future leaders, to tackle challenging ethical questions of the kind not typically covered in mainstream curricula.

* Marco Bizzarri, Patrick Peng, Marie-Luise Penter, Lisa Peyer and Rodrigo Ferrari

Feature image: flickr.com/phrawr (CC BY 2.0)