Page 307 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 20. Which one of the following items is not included in the managerial remuneration?
(a) Dearness allowance
(b) Salary
(c) Commission

(d) Encashment of leaves



Case Study Managerial Remuneration/Incentives

The Company
A medium sized mortgage broker with 10 sales staff and 4 administration staff - two of
which handle complaints.
Current Practice
Currently the firm’s consultants earn commission for reaching sales targets, and bonuses
on top when certain milestones are passed. No other incentive system operates, but staff
are required to follow FSA Rules on complaint turnaround times.
The TCF Problem

As a result of the sales incentive programme, consultants are encouraged to complete as
many sales as possible in a given timeframe. The risk to customers is that, in their eagerness
to meet targets, advisers may be tempted to sell a suitable product with which they are
familiar when there are others equally or more suitable available for the particular
individual in question. As a result customer choice – and therefore fair treatment - may be
compromised.
At the same time, opportunities to encourage other staff members to implement TCF are
being lost. For example, as things stand staff who deal with customer complaints have no
incentives to spot and report opportunities to improve service and reduce future
complaints. Their only incentive is to turn complaints around within the FSA timeframes.
TCF Solution

Sales
To encourage a more balanced approach to sales, the firm could include risk and service
performance targets in its rewards programme and make it known that it monitors sales
of individual product type against each adviser.
The additional targets might require the consultant to document the range of suitable
products discussed with the client and the reason for the final choice out of these. Consultants
would only qualify for commission on satisfactory completion of these details - which
will be open to scrutiny during file checks and/or if sale statistics suggest undue emphasis
of a broker selling one product type. By making consultants aware that MI will monitor
sales of individual product by consultant the firm will further encourage them to consider
a wider range of similar products and be ready to justify the final choices they make.

Contd...

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