By Jonathan Davies

With just 11% of the population trusting them, bankers are among the least trusted workers in the UK, third only to journalists and politicians.

But why are bankers so afraid of doing the right thing? A new report from PwC and London Business School claims to have found the answer.

The report found that a 'get tough' approach to poor employee performance in terms of behaviour and meeting targets risks creating a climate of fear and breeding more unethical conduct in financial services — the opposite of what regulators, businesses and the public want.

The report, based on a study of 2,431 managers from UK financial services organisations representing banking, insurance and wealth management, reveals that when presented with situations where the negative consequences or punishment for poor performance were highlighted, managers were 15% more anxious than excited, leading them to be more than twice as likely to behave unethically. Managers presented with the same situations, but with the positive outcomes of success highlighted, were correspondingly more excited, leading them to be more than twice as likely to demonstrate innovative behaviour.

Duncan Wardley, people and change director and behavioural science specialist at PwC, said: “We are not suggesting that rules and penalties for bad behaviour should be abandoned as it’s essential that people know what is acceptable and what isn’t, and criminal behaviour should be punished. This is about the sorts of pressures that push ordinary, well-meaning people into behaving less ethically that they would want to by cutting corners and hiding mistakes.

“Regulators and financial services leaders can change behaviour within companies by increasing emphasis on the positive outcomes of good performance, instead of solely focusing on the negative outcomes of the bad behaviour they want to stamp out.”

The research also reveals that when it comes to bonuses, size isn’t everything. Managers were asked how their company’s approach to rewards made them feel. When it made them feel anxious, they tended to say money was one of their key motivators. They also tended to take more risks and make unethical choices. On the other hand, people who say their company’s approach made them feel excited were less driven by money and more likely to be motivated by approval from their bosses, colleagues and clients for doing a good job.

Commenting on remuneration and reward implications, Tom Gosling, head of pay, performance and reward at PwC, said: “Tough medicine prescribed by regulators to curb conduct issues meets the public appetite for retribution. But pay regulation based purely on pay structures and penalties can unintentionally create the very conditions that make unethical behaviour more likely. Our research shows that an approach to pay regulation that focusses too much on pay instruments, deferral, and clawback can create the emotional states in which creativity is crowded out, focus on financial rewards is maximised and unethical behaviour is more likely.

“Deferral and clawback are necessary pieces in the puzzle. But pay regulation has become too focused on how people are paid and not enough on what people are paid for in the first place. Regulators need to focus on creating a positive culture in which ethical behaviour is a result of employees’ intrinsic motivation as opposed to fear of negative consequences.”