What makes an appropriate incentive?

There is a conversation going on right now about what are appropriate metrics and targets for incentives. Companies exist to make money. That fact is often advanced as a reason for assuming that they will place their benefit above customers, but failing companies the world over are often exemplars of companies that have placed financial gain above the need to serve customers well. In practice, over any significant amount of time, those two goals are inseparable. Sooner or later the truth comes out. 

Short-term incentives play a part. People find it hard to always be thinking about the long-run. A certain amount of get up and go is generated by creating a sense of urgency. Time-based incentives can do that. But they risk abandoning the long-run worries about sustainability to the excitement and rewards of the moment, or at least, the period of qualification for a bonus. Time-bound rewards can create oddly powerful incentives. Think of the value of the last piece of business that takes a person across a qualifying line for an incentive or bonus. 

Yet there must be measurement. Without it shareholders will abandon the sector. Their capital and expectations of return create opportunities: they invest in new technology, the basis for efficiency gains, reduced premiums, and improved service to customers. They invest in research and development, allowing new products to be developed. Go back in time and there was no cover for heart attacks, or any other trauma condition, or income protection. There were no e-apps. Cool online tools did not exist. They did not spring fully-formed from the ether. Plenty of innovation is required to make our markets and services better. More is needed, not less, in order to close the under-insurance gap and make New Zealand's insurance industry as efficient as that of, say, the UK's. 

Some ideas have been generated about how to manage these conflicting forces. In Australia APRA has sought to advance the concept that 50 percent of the measurement criteria for executive bonuses must not be financial. That has recently come under attack. Several prominent chair people (present or past) of companies in Australia have questioned the initiative, even calling it a misinterpretation of the intention of the Hayne Commission report, as Patrick Durkin reports in this article at the Australian Financial Review. They are not alone. NAB received an unprecedented 88% protest vote against some of their plans to introduce non-financial metrics. That could be a question of exactly what those metrics are, and also communication, but highlights the risk that change will alienate investors.

Clearly, there is a lot more thinking to be done on this area.