Question: Why do people do anything?
Answer: Because there is something in it for them.
Am I being cynical or just a realist? OK, maybe there are some altruists and philanthropists out there, but you could argue that even they do what they do for the feel good factor it gives them.
So if we accept that behaviour is driven by reward/consequences then how can we use this knowledge to improve regulatory compliance within firms?
Wal-Mart has just announced that they will in future be tying part of their executives’ compensation to meeting compliance standards. Now without the full details we do not know how much of their compensation is tied to compliance, but it appears to be an encouraging step nonetheless.
However I think their approach is flawed. The article states that the “audit committee now can choose to reduce or eliminate 2014 cash incentives for top executives if the company doesn't meet certain compliance objectives”
Fear of financial loss is being used to try and bring about a change in behaviour. A system based on fear will eventually fail, just look at the political systems that have tried this approach. In the business world there may be some short-term successes, but fear does not embed change in the long-term. There is plenty of evidence out there that any business run on fear has the long-levity of a mouse in a sack of cats.
Part of the blame for the credit crisis was aimed at remuneration practices that encouraged risk-taking behaviour. Therefore if we want to change behaviour (this time for positive results) then we should focus upon rewarding compliant behaviour, rather than punishing non-compliant behaviour.
The cost of this approach does not have to be higher. Simply structure remuneration schemes so that the ‘compliance reward’ is deducted from the overall compensation package, and then only added back if requirements are met. Same cost, but a negative is turned into a positive, which might, just might, bring about the desired change behaviour, and help sustain that change in behaviour.
It is safe to say that the financial services industry does not have the best of public profiles at the present time. Here is an opportunity for us to use one of the main lessons learned from the credit crisis, rewards drive behaviour, to bring about positive change that can help regain some much needed public confidence.