Incentive Compensation Management in an Era of New Financial Regulations

March 20, 2013

Do you have the right business processes in place?

The Dodd-Frank Wall Street Reform and Consumer Protection Act, to put it mildly, is a highly complex piece of legislation. Even today, almost three years after it was enacted, financial firms are still evaluating its impact and best practices for ensuring compliance.

However, one thing has become clear to financial organizations of all stripes — under Section 956 of the Dodd-Frank Act, institutions must prove their incentive compensation plans are highly secure and do not encourage unsound or inappropriate risk-taking behavior. While some may debate the effectiveness of these regulatory measures, the reality is that institutions need to ensure their recruitment strategies and compensation practices are tightly managed and in compliance.

Today, this means banks must have visibility into more than just the top 10, 20 or 100 executive compensation plans. Under Section 956, banks must extend oversight to anyone paid an incentive for performance. At larger institutions, that number could easily exceed 25,000 employees. For firms of this size, manual incentive compensation management (ICM) processes are simply incapable of handling the staggering amounts of data complexity and detailed reporting required by current regulations.

Here are just a few questions large financial institutions should consider as they review their ICM processes:

1. How do new incentive compensation rules impact talent acquisition?

Sales incentives have traditionally been a key factor in attracting and retaining the best talent. But some new regulations require companies to distribute incentive payouts over longer performance periods in an effort to discourage reckless financial risk-taking. The goal is to force financial institutions to look at the long-term viability of decisions they make today, and reward or punish employees for decisions that impact financial performance and shareholder value.

While this type of regulation can help instill greater fiscal accountability, it can also hurt sales results by forcing top performers to wait longer for compensation. As a result, increased oversight has dampened the ability of banks and other financial institutions to attract and retain the best and the brightest. Potential recruits may instead move to industries that can offer more immediate incentive payouts with less oversight, such as the technology sector. For more insight on talent acquisition, read “Attracting and Retaining the Top Talent: Challenges and Strategies for Success.”

2. Can your compensation plan design keep up with regulatory change?

Inflexible ICM systems and complex sales compensation plans are serious challenges for any business, but in the financial sector they present additional legal pitfalls as well. From a business perspective, manual ICM processes and spreadsheets can result in error-prone and delayed incentive payments. Plan modifications are difficult and time-consuming at best.

However, financial institutions have the additional burden of complying with reporting requirements under the Dodd-Frank Act. Without the required reporting capabilities and a well-documented audit trail, organizations can face huge administrative costs, fines and legal consequences if they fail to provide accurate information to federal regulators.

3. How can sales performance management integrate key processes to simplify compliance?

While many large financial institutions have some level of automated incentive compensation management, many lack end-to-end visibility and integration across key business processes such as incentive management, communication and reporting. Sales performance management (SPM) solutions can help organizations meet their compliance requirements and generate valuable insight by integrating these processes to transform static, fragmented data into dynamic business process intelligence. In addition, SPM specifically helps banks and insurance companies resolve the challenges of new regulatory measures by enabling them to:

  • Reduce the cost and complexity of managing compliance
  • Modify incentive plans to attract and retain talent while ensuring compliance
  • Deliver accurate and timely compensation payments that motivate and drive sales force behavior
  • Improve tracking, monitoring and record keeping for compliance
  • Gain valuable business intelligence through integrated business process reporting


How are you managing your ICM processes? Do you have a homegrown system or are you considering business process outsourcing for SPM? Join the conversation and leave your comments below!

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