Lloyds TSB has been fined £28m by the UK Financial Conduct Authority for a dubious bonus scheme.
For once, it doesn't involve investment bankers: Lloyds' dodgy bonuses applied to sales staff working in Lloyds TSB branches who were busy selling protection products to retail customers.
Nevertheless, the scheme reads like how not to structure a bonus system. Investment banks who are grappling with their own bonus issues may want to take note.
1. There was a massive marginal incentive to exceed sales targets
Lloyds TSB advisers received zero bonuses until they exceeded their sales targets. Once they exceeded their targets, their bonuses very steadily increased and could be quite generous. The graph below shows bonuses paid on a monthly rather than an annual basis. The highest paid advisers received £6k a month.
The result was, predictably, a massive push to exceed the target. At Halifax, which had a similar scheme, some badly behaved advisers were found selling products to friends and family.
2. Lloyds TSB staff were encouraged to obsess about the state of their bonuses
Lloyds staff were able to access details of their performance compared to their targets on a daily basis, with the predictable result that this became their raison d'être.
They were also provided with information that enabled them to calculate their potential bonuses whenever they fancied.
Advisers' behaviour became heavily oriented towards bonus maximisation. They could earn £600 for every protection policy sold and £60 for every regular premium investment plan sold. Lloyds' sales of protection products increased 65% as a result; sales of investment products fell 54%.
3. Lloyds TSB advisors had salaries which ratcheted down - and then stayed down - when they failed to meet their targets - creating a skewed incentive to exceed targets
Lloyds TSB advisors weren't only in receipt of performance-related bonuses, they also received performance-related salaries.
Salaries were determined by the level of sales an adviser made and the resulting 'sales tier' which the adviser fell into. An adviser who reached the sales point of a higher tier over three quarters automatically qualified for a salary increase and promotion to that tier. However, advisers who had the misfortune to drop down a tier were forced to stay at that lower tier for at least nine months, creating considerable incentive to maintain sales come what may.
At Halifax, one advisor found himself at risk of both dropping a salary tier and having to repay a 'bonus deficit' of £5k. He promptly sold critical illness cover, life cover and death-expenses cover to both himself and his wife.
4. Advisors were encouraged to think of bonuses in the context of Champagne
Internally, Lloyds TBS's bonuses were crassly referred to as 'Champagne' bonuses. Champagne was popular in the run up to the financial crisis. Since then, British consumers have very quietly switched to fizzy wine.