Companies in several industries are redesigning compensation plans due to regulatory intervention. Financial services firms, for example, are reacting to the April 6 U.S. Department of Labor (DOL) ruling that requires advisers working with investments that are governed by the Employee Retirement Income Security Act (think 401Ks and IRAs) to act as fiduciaries and put their customers’ best interests before their own. Even if advisers were already behaving in that manner, the ruling calls into question some of the commission-based incentive practices that are common in the industry.

The DOL ruling is just one example of an intervention that has caused companies to rethink sales incentives. Across a range of industries, we’ve seen companies adopt new strategies in response to regulatory intervention. Here are four strategies that we’ve seen:

  1. Change the mix between variable incentive and base pay. Moving earnings from variable to base salary can sometimes address the issues at hand. This type of change is likely to have a significant impact on the sales culture—good and bad—and should be managed carefully. Companies certainly can succeed with high-salary sales roles, but doing so requires a significant lift in coaching, performance management and culture to fill in for areas where incentives previously may have been “governing” the field.

  1. Introduce new metrics to recognize other key dimensions. Another common solution is to move away from the troublesome metric. Possible avenues to do this include:
    • Introducing new metrics, such as a non-sales metric (such as customer satisfaction).
    • Redefining the existing metric by restricting which customer segments are included. Healthcare companies, for example, have done this when reacting to a government action by restricting which doctors are included for compensation purposes.
    • Switching to a flat pay rate across all products that will adequately protect the customer. For example, some financial services companies are considering a shift from product-specific commissions to level commissions or bonuses on assets under management (AUM) in response to the DOL’s fiduciary rule.
  1. Calibrate the steepness of pay rates based on things other than short-term profits. A common trigger for a regulator is misalignment between the actual payout rate and the amount that external stakeholders perceive as appropriate. During this redesign and future redesigns, the compensation team should consider if the pay rates or differences in pay rates may tempt salespeople and advisors to act out of line with the customers’ best interests.

  1. Improve governance. Almost every organization will implement or improve its governance process in some way to ensure compliance. A governance board and process are usually put in place or strengthened to review how incentive plans, contests and recognition programs are constructed. It’s also important to have strong monitoring in place, and with large, distributed sales teams, this often starts with an analytics-based approach. Organizations should design an analytical process to identify signs that an action not in the client’s best interest may have occurred, and should refer those situations to the governance board for further review. 

Each regulatory intervention is unique, particularly because regulatory actions address complex issues. The team to address these actions should include experts on sales process, sales compensation and some form of legal counsel (please note that the opinions expressed in this blog are not legal advice). This team should weigh the specific regulatory action, the company’s culture, and the perspective of external and internal stakeholders when deciding how to react. You should begin assembling your team and starting the process quickly after the government intervenes. Usually, the timeline to implement changes is short and has a more complex approval process than a normal design. We consider it a best practice to allow six months to communicate and plan for a major new compensation change, so if regulation is requiring compliance in a year, it’s time to get started on design now.


Topics: incentive plan, Brian Keating, department of labor, regulations, save your savings, government intervention