Insurers, Bankers Can’t Be Scared Into Doing Right Thing: PwC Survey

A get-tough approach to poor employee performance, in terms of behavior and reaching targets, risks creating a climate of fear and breeding more unethical conduct in financial services – the opposite of what regulators, businesses and the public want, according to a joint PwC and London Business School report titled “Why you can’t scare bankers into doing the right thing.”

The report, based on a study of 2,431 managers from UK financial services organizations representing banking, insurance and wealth management, reveals that when presented with situations where the negative consequences or punishment for poor performance were highlighted, managers were 15 percent more anxious than excited, leading them to be more than twice as likely to behave unethically.

Managers presented with the same situations, but with the positive outcomes of success highlighted, were correspondingly more excited, leading them to be more than twice as likely to demonstrate innovative behavior.

“We are not suggesting that rules and penalties for bad behavior should be abandoned as it’s essential that people know what is acceptable and what isn’t, and criminal behavior should be punished,” said Duncan Wardley, people and change director and behavioral science specialist at PwC. “This is about the sorts of pressures that push ordinary, well-meaning people into behaving less ethically that they would want to by cutting corners and hiding mistakes.”

In a PwC press release, Wardley said, regulators and leaders of financial services companies can change behavior “by increasing emphasis on the positive outcomes of good performance, instead of solely focusing on the negative outcomes of the bad behavior they want to stamp out.”

The research also reveals that when it comes to bonuses, size isn’t everything.

Managers were asked how their company’s approach to rewards made them feel. When it made them feel anxious, the report said, they tended to say money was one of their key motivators. They also tended to take more risks and make unethical choices.

On the other hand, people who say their company’s approach made them feel excited were less driven by money and more likely to be motivated by approval from their bosses, colleagues and clients for doing a good job, the report continued.

“Tough medicine prescribed by regulators to curb conduct issues meets the public appetite for retribution,” said Tom Gosling, head of pay, performance and reward at PwC, who commented on the remuneration and reward implications of the trends highlighted by the report.

“But pay regulation based purely on pay structures and penalties can unintentionally create the very conditions that make unethical behavior more likely,” he added. “Our research shows that an approach to pay regulation that focuses too much on pay instruments, deferral, and clawback can create the emotional states in which creativity is crowded out, focus on financial rewards is maximized and unethical behavior is more likely.”

While deferral and clawback are necessary pieces in the puzzle, Gosling emphasized in a statement, pay regulation has become too focused on how people are paid and not enough on what people are paid for in the first place. “Regulators need to focus on creating a positive culture in which ethical behavior is a result of employees’ intrinsic motivation as opposed to fear of negative consequences.”

Source: PwC