Profit-first culture study: tired, incentivised staff make poorer risk decisions

An experiment was designed to mimic investment decisions taken by bank executives, such as underwriting insurance, buying securities, and granting loans. The participants had to decide whether to invest in something after doing some simple analysis with a calculator. The experiment took place over a one-hour session and participants could invest in up to 60 transactions. 

Participants were given risk policy/limits to reflect the industry context, with the risk policy/limit set in terms of the maximum allowable loss on the transaction. High risk investments were forbidden, even if the transaction could be highly profitable.

Out of the 60 transactions, 20 exceeded the risk limit. Participants could choose whether to comply or not, however, they knew they would be penalised if they were caught investing in non-compliant transactions. Participants were told that 20 per cent of their transaction would be checked for policy compliance.

With assistance from professional membership body, Financial Services Institute of Australasia (FINSIA), finance professionals were recruited to participate in the study. Cash payments were provided to participants immediately following the experiments, depending on their decisions.

There has been a lot of discussion in recent years about financial institution culture and how it can affect behavioural norms, making it more important than ever to differentiate between what people's policies say, and what actually happens.

New staff members learn how to behave in an organisation from those around them and discern the norms based on what gets rewarded, the actions of those they admire in the workplace, what behaviour builds status, and to what extent bad behaviour is excused. This information creates a perception of the norm.

Profit-focussed framing and risk-focussed framing were used to mimic these influences in a lab setting. Participants received a short paragraph of text and a picture at the beginning of the experiment, which was repeated at regular intervals.

At the end of the experiment participants were asked to complete a short survey to allow understanding and control for variables, such as attitudes and demographics. They were also asked a crucial question about their perceptions, with the answer to the question generally a good measure of what workplace culture is and was expected to predict how people would behave.

Comparing the two groups, it was expected that the second group would complete more transactions, but be less compliant with the risk policy. The proportion of those who complied with risk policy decreased from 68.6 per cent to 42.3 per cent when incentives were introduced. The average number of total investments increased from 28.4 per cent to 30.3 per cent, which was not enough to be statistically significant.

The results were surprising, since incentives are supposed to encourage staff to work harder to benefit shareholders. These results are consistent with a recent report from the UK that found reducing profit-based incentives had not adversely affected business outcomes.

These results are also consistent with the possibility that finance professionals are essentially motivated to work hard, which means pay-for-performance and outside motivation is not essential.

It was found that when fewer calculations were required, the more people entered into investments. It was also found that the compliance rates significantly improved. This study was consistent with previous research that showed people who are not tired or depleted are better able to regulate themselves and resist the temptation to break rules or cheat. 

Incentives were found to influence compliance behaviour, but it remains true that other factors might also be important and influence decisions. Individual characteristics such as attitudes, personality, and age were considered, as well as the investment characteristics and that of the workplace or each participant. An individual may be influenced by their surroundings if their workplace does not take compliance seriously.