The Trap Of Perverse Incentives

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The Trap Of Perverse Incentives

An audit was performed on a regional bank in Asia who was doing a great job on big issues.  Compliance was a priority – blocking certain wires and closing a few accounts here and there.

But as auditors do – we found a big problem.  We found many client folders and records deficient of good Customer Information and Know Your Customer data.  Their records were not inaccurate  -only many were just  incomplete. The bank does have a novel idea which has been a common practice for some years in Asia and which the rest of the world has not yet caught onto: at the time of the account opening a picture is taken of the person.  So while the clerks do check signatures they also do check pictures of the people from their banker terminals at the counter – very smart.

Anyway back to the missing data.  The result of the investigation that had missing data was very interesting – for us investigators.  We noticed an on-going theme in the account records with missing data.

In order to confirm our suspicions, we questioned the Branch Assistant Managers who were in charge of account openings, and after doing so, presented our findings.

What we expected to see was Assistant Manager’s signature on all account openings, as it is part their duty to approve any account openings. What we found instead was that a vast majority of the authorizations were not made by the  Assistant Managers but the Branch Managers.

The account opening scenario, we discovered, goes as follows…

1. The customer meets with a bank Account Representative and the Account Representative gets as much information as they can during the meeting and then takes the customers deposit and application forms to the Assistant Manager to open the account.

2. The Assistant Manager reviews the application forms and says “This is simply not good enough, we need this and that form and ID” and the Account Representative says “If we pressure these people too much they will take their money and go to another bank!” –

3. Thus, the Account Representative supersedes  the Assistant Manager to the Branch Manager and the Branch Manager signs off on the account opening.

4. Why?

Perverse Incentives:

Account Representatives are given a bonus based upon how many accounts they open.

Assistant Manager has a bonus tied to compliance.

Branch Manager has a bonus tied to gross new deposits.

One can quickly see how the Branch Manager and the Account Representative have parallel incentives that ignore the Assistant Manager’s duties and incentives which are set in place to maintain conformity and obedience according to the bank’s regulations


The Account Representatives need to quit their objections  about Customer Information Procedures and make it clear to the customer what information is needed from the start.  They need to look at the customer right in the eye and say – “This bank follows all compliance rules as we must – and as you are of this high caliber I know you do too. So help me finish this application so we can get enrolled in a bank that is safe and not careless.”  The bonus to the Account Representatives will be paid only on those accounts opened and deemed compliant by the Assistant Manager – no credit will be given toward bonus for the Account Representatives for accounts opened by the Branch Manager.

This is so simple – it gets the work done from the beginning and does not waste  the time of the Branch Manager and that of the Assistant Branch Manager fixing the problems that occur later- which they most certainly will.

All can be fixed by aligning incentives and a bit of basic sales training.

Do it right and do it once.

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