Retail Banking Profitability

1. Quantitative analysis

     1.1. Economic assessment

             1.1.1. Additional costs

             1.1.2. Required revenue increase

2. Qualitative analysis

     2.1. Risks and mitigation

3. Recommendation

• RetailBankingCo plans to sell four products through this incentive program, which include CDs (certificates of deposit), checking accounts, mutual funds, and IRAs (individual retirement accounts).
• The lifetime of each of these four products is 3 years.

• The closing commission is paid once when a new product is sold.
• Compound interest can be disregarded.
• Although RetailBankingCo's current focus is on revenuves, the implementation of the incentive program should not come at the expense of profitability, i.e., they want to maintain their current operating profit margin.

While RetailBankingCo is looking to increase its revenues, which can only be achieved by selling additional products, this should not occur at the expense of revenues from existing products. Therefore, the commission model should account for both by providing a fixed closing commission for new products and a percentage-based trailing commission for existing products.

Although RetailBankingCo's products each have different average deposits and operating profit margins, the average operating profit per product is consistently $80. Therefore, the commission must not exceed $80.

• Misaligned incentives: The commission model may encourage the sales force to prioritize short-term gains over long-term customer relationships or product suitability, potentially harming the bank's reputation and customer satisfaction. To mitigate this risk, RetailBankingCo should implement guidelines for ethical sales practices and provide training to ensure the sales force understands the importance of long-term customer satisfaction.
• Cannibalization of existing products: The incentive program may lead to salespeople pushing new products at the expense of existing ones, which may harm the client's overall revenue. To address this risk, the commission model should account for both new and existing products, as suggested, and regularly monitor sales performance to ensure the balance between new and existing product sales is maintained.
• Employee dissatisfaction: If the commission model is not perceived as fair or transparent, it may lead to dissatisfaction among the sales force, which could impact their motivation and performance. To mitigate this risk, RetailBankingCo should involve the sales force in the design of the commission model, clearly communicate the rationale behind the model, and ensure that the model is transparent and fair to all employees.
• Increased operational costs: Implementing the incentive program may lead to increased operational costs, such as managing the commissions and monitoring sales activities. To mitigate this risk, RetailBankingCo should carefully assess the costs associated with implementing the program and ensure that the potential revenue increase justifies the additional expenses.
• Compliance and regulatory risks: The introduction of a commission-based incentive program may expose the client to increased compliance and regulatory risks, especially if salespeople engage in aggressive sales tactics or mis-selling. To address this risk, RetailBankingCo should establish robust compliance mechanisms, provide training on compliance and regulatory requirements, and monitor sales activities to detect and address any potential issues promptly.

• First of all, RetailBankingCo should implement the commission-based incentive program under the condition that it expects revenues to increase by at least 6.67%. Given a fixed closing commission of $4 for new products and a 5% trailing commission for existing products, totaling $16 per product, the client must achieve the aforementioned revenue increase to recover the costs.
• However, there are several potential risks associated with the implementation of the incentive program that need to be considered and mitigated. These risks include misaligned incentives, cannibalization of existing products, employee dissatisfaction, increased operational costs, and compliance and regulatory risks. RetailBankingCo should establish guidelines for ethical sales practices, provide training, involve the sales force in the design of the commission model, carefully assess the costs associated with implementing the program, and establish robust compliance mechanisms to address these risks.
• As next steps, the client should conduct a thorough assessment of the costs and benefits of the proposed incentive program and consult with the sales force, as well as develop a comprehensive implementation plan, including training, monitoring, and compliance measures, to ensure the success of the program while minimizing potential risks.