- SCU Home Page
- About SCU
- On Campus
- News & Info
Business Ethics in the News
LLOYDS BANKING GROUP: The Pitfalls of Performance-Based Pay
Monday, Dec. 16, 2013
Wednesday, Lloyds Banking Group was fined £28 million ($46 million) by the U.K. Financial Conduct Authority for “serious failings” in the bonus and pay structure for its sales staff. The incentive structure, which ranged from substantial pay increases (and cuts), cash bonuses, and even bottles of wine, resulted in widespread instances of sales representatives pushing products that customers did not necessarily want or need. The FCA said that the incentive structure was so extreme, at times increasing or cutting a sales representative’s pay by 50%, that sales staff were likely driven to sell ill-suited products to customers. The FCA also expressed concern over a conflict of interest, as sales managers, whose compensation was tied to the performance of the sales staff, were in charge of administering the incentive structure.
When do performance-based pay structures result in improper practices? How could Lloyds adjust its incentive structure to alleviate these concerns?
Kirk: There is an ethical risk within any performance-based pay structure. Managers must strike a balance between incentivizing to produce “at all costs,” and incentives that promote productivity within the context of the company’s values. By and large, maintaining an ethical culture is the only way to walk that line. The more pressure there is on sales teams to produce, the importance of a strong ethical culture grows exponentially. Without it, financial incentives will inevitably lead to improper behavior. A good first step for Lloyds would be to remove the conflict of interest in the program’s administration, and make good with the customers who were adversely affected.
Patrick: Financial incentives, particularly in sales, just plain work (Lloyds business in areas with these incentives increased by 66% in a 2-year period). In a vacuum, I find nothing wrong with these pay structures: its on sales staff to follow the code of conduct, regardless of the potential payout. But that notion falls apart when it comes to light that Lloyds continued to reward bonuses, despite knowing that customers were being sold unnecessary products. Lloyds incentivized, and validated, the type of production “at all costs” that Kirk mentions above. This program needs a complete overhaul.
A Framework for Thinking Ethically (Markkula Center for Applied Ethics)
NEXT STORY: GM PROMOTES FIRST FEMALE CEO