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Profit-based incentives hurt compliance: report

Financial services professionals are less likely to comply with risk policies if they are motivated by profit, according to new research by Macquarie University.


The report, funded by Macquarie University’s Applied Finance Centre and co-branded with the Financial Services Institute of Australasia (FINSIA), outlined six key findings from an experimental study conducted with 300 FINSIA members on risk management and compliance.

“When you introduce the profit-based incentives, it really changed things,” Ms Sheedy said.

“It changed the amount of compliance, and so people were much less compliant with policy when those incentives were in place.

“And the other thing was that it changed the culture. The culture becomes less favourable to risk management, and therefore people don’t behave as well.”

In the experiment, 300 financial services professionals were asked to mimic the investment decisions of bank executives and had one hour to conduct simple calculations and decide whether to invest in transactions. At the end of the hour, all were offered cash payment for taking part in the study.

Participants were sorted into six groups with different variables, such as the offer of fixed or incentive-based payment; the provision of risk or profit or no ‘framing’, wherein participants received a short paragraph about the workplace culture of the simulation prior to starting the experiment; and calculations, the absence of which revealed an increase in risk compliance due to lessened cognitive load.

The research results found that the ‘incentive payment, profit framing’ group was least compliant with risk policy (63.7 per cent), while the group with fixed payment and no framing were most compliant (85.9 per cent).

Commenting on the experiment, Ms Sheedy told InvestorDaily it was the first time this experimental research method had been applied to this kind of research question.

“I wasn’t sure whether we would be able to create culture in a lab,” she said.

“But we did. And I was very excited.”

Moving forward, Ms Sheedy said the experiment proved there was more research to do and called on government and industry to dig deeper.

“I think the point to make here is that it is quite expensive research to do,” she said.

“We spent about $35,000 in participant payments.

“The government attitude is: 'this is highly industry-relevant research. We’re not willing to fund it'. They might co-fund it, but the industry absolutely needs to put their hands in their pockets.”

 

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