The Royal Commission illustrates that people are one of the greatest sources of organisational risk, according to Gordon Williams and Harriet Eager, who explain that there are four important questions HR needs to ask in auditing remuneration systems
The Hayne Royal Commission’s 1068 page report into the financial services sector was made public on 4 February 2019. It contains broad-ranging recommendations that will have a significant impact on the sector going forward. For human resources and remuneration specialists, there is a lot to think about and while the recommendations are directed at the financial services sector, many have broader relevance. Here are our key takeaways for human resources and remuneration specialists.
Lessons for all HR professionals
The Royal Commission illustrates that people are one of the greatest sources of organisational risk. This will not come as a shock to most HR specialists. The Royal Commission’s findings highlight that HR governance and the appropriate management of HR risks needs to be a key focus in every organisation. We suggest this be addressed by adopting a three-step process.
Step 1: Reflect on the Royal Commission’s HR themes and adjust your HR governance model as required
Misconduct: One of the Royal Commission’s key themes was that historical misconduct had either not been identified or appropriately penalised. This highlights the need for:
- Effective mechanisms for people to safely ‘speak up’
- An effective consequence management framework that ensures misconduct is treated appropriately (eg, reduction in variable pay, warning, termination of employment etc) and consistently.
“One of the Royal Commission’s key themes was that historical misconduct had either not been identified or appropriately penalised”
Culture: applying the Commissioner’s articulation of culture as an organisation’s ‘shared values and norms that shape behaviours and mindsets‘, some of the issues to consider are:
- Setting clear expectations so that no one in your organisation is in doubt about the behaviour that is, and is not, acceptable. This requires more than putting a Code of Conduct on your intranet – you need meaningful and regular training about your organisation’s culture, appropriate behaviour, expectations and on making the ‘right’ decision
- The need for the Board and senior managers to model the right behaviours and set the ‘tone from the top‘. Training is an important part of this, as is an appropriate remuneration model that rewards good conduct and penalises bad.
Using data: Organisations hold a huge amount of data and using this effectively can help identify ‘hot spots’ within your organisation – eg, a high number of customer complaints, high staff turnover or levels of absence are generally worth looking into. Of course, the effective use of all this data requires capable IT systems, good practices for data recording and regular analysis (much of which can be automated).
Step 2: Undertake a gap analysis to ensure your current HR governance model is fit for purpose
We recommend all organisations undertake a desktop ‘gap analysis’ of their HR structures, systems and processes (eg, policies, training program, capabilities etc) to make sure they support your people to do the ‘right thing’. For most organisations, this won’t uncover major faults but will be more about tweaking and supplementing current HR governance models. A comprehensive gap analysis should be undertaken periodically (for example, every 3 years) possibly with the support of an independent third party.
Step 3: Ensure your HR governance model is implemented and complied with at all levels
There is no benefit in having a gold plated governance model, if your HR structures, systems and processes aren’t applied and complied with. Field audits to ensure compliance are important – these should be periodic and should involve reporting to senior management and possibly the Board.
“There is no benefit in having a gold plated governance model, if your HR structures, systems and processes aren’t applied and complied with”
In light of the above, if you aren’t already, here are some key questions you should be asking about your organisation’s HR structures, systems and processes:
- Are your current HR structures, systems and processes fit for purpose – what gives you and your Board members or senior managers the comfort that they are?
- Are people actually attending your training sessions?
- Do managers have the skills to deal with the HR components of their role?
- Is misconduct identified (promptly) and are there appropriate, and consistent, consequences?
- How do people in your organisation know how to make the ‘right’ decision? What guides them?
- Are people comfortable to ‘speak up’ about their concerns – and importantly, how do you know?
The Royal Commission pulls no punches in linking misconduct and poor customer outcomes to the remuneration systems within the financial sector. The Commissioner also made the point that executive remuneration and culture ‘walk together’.
However, the Commissioner stopped short of making specific recommendations about remuneration structures (eg, the Commissioner did not propose caps on pay, rules about pay mix or compulsory deferral). In fact, most of the Commission’s recommendations about executive remuneration are directed at APRA’s role in supervising remuneration principles, standards and guidance – meaning they will directly impact APRA regulated organisations but not others.
Despite that, the key themes from the recommendations around executive remuneration have broad application to all sectors. These include a broader focus on avoiding non-financial risks, requiring Boards to regularly assess the effectiveness of their remuneration systems (including applying claw back where appropriate) and requiring organisations to improve the quality of data flow to Boards and remuneration committees.
Many financial services organisations have already redesigned their remuneration systems to address these issues as a result of the Royal Commission. If you have not done so yet, now is a good time to look at your remuneration systems, starting with an audit that includes the following questions:
- When was your remuneration system last reviewed (including performance metrics) – is it appropriate today, and is it reviewed regularly, to drive the right outcomes and manage risk and conduct?
- Do your remuneration systems include appropriate non-financial metrics (eg. organisational reputation and risk, customer focussed outcomes)?
- Do your variable pay plans provide for clawback of remuneration already paid (as well as malus – ie, the ability to reduce pay before it has vested)?
- Do your directors and other key decision makers truly understand your organisation’s remuneration systems, what they are designed to reward and how they seek to manage risk? Is this backed up with quality and timely information?