TCF-linked executive pay could start a trend

Jul 12 2007 David Salt

While some firms missed the Financial Services Authority's March deadline for implementing its treating customers fairly objective, it seems others have grasped the nettle and are actually planning to link executive pay with customer satisfaction results.

In the last few weeks we may have seen something of a new trend emerging. HSBC recently announced that it would start linking executive pay with customer satisfaction survey results, while further afield, the Bank of Tokyo-Mitsubishi UFJ announced pay cuts to three of its top executives for failures to treat its customers "properly".

The industry is still in the process of debating what TCF actually means. If HSBC and Bank of Tokyo-Mitsubishi are any indication, it could have some far-reaching and very tangible ramifications.

The HSBC example does not appear to be an explicit nod to TCF, however. Michael Geohegan, HSBC's chief executive, announced at a recent conference in Lisbon that customer satisfaction levels would determine senior management bonuses. At no point in his brief and sketchy announcement did he mention that the measures were aligned with the FSA's treating customers fairly principle. While an HSBC spokesman was aware of Geohegan's announcement, he was not aware of TCF, and seemed a little puzzled by the idea that his organisation would have a compliance department, which would be likely to have an interest in such a development. The spokesman simply told Complinet that the idea was in its early stages.

Japanese interests

The Bank of Tokyo-Mitsubishi UFJ, meanwhile, may only have a limited interest in the UK regulatory requirements. The language contained in its statement, however, seemed to indicate a strong connection with the UK regulator's TCF principle.

The Bank of Tokyo-Mitsubishi UFJ said that it would cut the pay of three top executives by 30 per cent for two months as a result of its failure to deal properly with customers in investment trust sales and oversee operations abroad. In addition, seven other responsible executives will be subjected to a pay cut of ten per cent for two months. The bank has since submitted to the Financial Services Agency corrective measures in which it will sell investment trusts by paying greater attention to customer needs, while creating a toll-free telephone centre to hear complaints from investors.

Notably, the bank stressed that its measures would enhance the legal compliance and governance of its overseas operations. The measures taken by Mitsubishi UFJ may give an indication that not only is there a possibility of an emerging trend for similar moves, but that such moves are being considered internationally.

Positive developments

Eurfron Jones, head of consulting at Huntswood, said that HSBC's move was a step in the right direction, which introduced a more balanced approach to executive remuneration to include both sales and service.

Jones told Complinet: "If part of the aim is to grow, then it's important that organisations see the benefit of not just sales but of service as well; this is a positive move.

"The key question I would have is how is fairness incorporated into the definition of service? How will that be measured? How will the organisation ensure that it isn't merely the customers' response to pure service issues that lead the agenda? Because, typically, most financial services organisations gather significant data about customer experience, but that's primarily around customer service. Customers can feel like they have been treated very well, but they may not have actually been treated fairly. Organisations can measure good service but this will not necessarily mean fairer outcomes for customers.

"The real winners in this will be those organisations that articulate properly defined fairness indicators. Customer satisfaction should incorporate some analysis of whether organisations treat their customers fairly. To date customer feedback has typically focused on service without highlighting or including fairness factors."

Jones said she did know of many organisations that were looking at how they rewarded their staff in the light of developments around TCF.

She said that if organisations were not convinced that this was a good thing to do "then they wouldn't do it."

"I think that where a business makes this type of move, it is because there is a business driver. However, the regulator may have instigated the debate and asked them to think of their business in a different way. I don't think that organisations would change their remuneration structures simply because the regulator told them that it was a good idea. Organisations would only do it if there was a good business driver. With better service, the quid pro quo is that customers will be inclined to spend more money with you — it's obvious."

Old hat?

Arguably such moves are not that new, with existing remuneration methods such as profit-sharing schemes and bonuses that are based on the success of company. These methods may sometimes be associated with treating customers fairly on the basis that company success is attributed to good service levels which, in turn, is often equated wrongly with treating customers fairly. This, of course, is far from the case. Customers can be subjected to mistreatment, regardless of the exponential increases in a company's profits and subsequent bonuses. By the same token, with businesses linking pay to customer satisfaction levels, many people may be quick to associate this with the fair treatment of customers.

A more significant and meaningful trend will be one where firms explicitly link treating customers fairly objectives with pay. Consultants appear to be of the belief that it will happen, with HSBC and the Bank of Tokyo-Mitsubishi UFJ being examples.

"The bottom line" is what counts, Jones said, with firms being motivated by the business benefits.

The views and the opinions expressed in 'hot topics' are that of the individual authors and not necessarily those of the Securities & Investment Institute.