The prudential regulator has proposed changes to remuneration rules after accepting existing guidelines on executive pay have contributed to banks’ poor treatment of customers.
The Australian Prudential Regulation Authority on Tuesday released a draft standard aimed at “clarifying and strengthening” remuneration requirements in APRA-regulated entities to reduce the likelihood of misconduct.
“In the financial sector, APRA has observed an over-emphasis on short-term financial performance and a lack of accountability when failures occur, especially among senior management,” APRA deputy chair John Lonsdale said.
“APRA will not be determining how much employees get paid … rather, we want to empower boards to more effectively incentivise behaviour that supports the long-term interests of their entities.”
APRA flagged its intention to strengthen prudential requirements on remuneration in April last year following its Review of Remuneration Practices at Large Financial Institutions.
It said the need was underlined by the findings of the financial services royal commission, last year’s prudential inquiry into the Commonwealth Bank, and the recent industry self-assessments on governance, accountability and culture.
APRA’s proposals include ensuring financial performance represents no more than 50 per cent of performance criteria for setting bonuses.
“Limiting the influence of financial performance metrics in determining variable remuneration will encourage executives to put greater focus on non-financial risks, such as culture and governance,” Mr Lonsdale said.
The regulator also wants to introduce minimum deferral periods of seven years for variable remuneration of senior executives in larger, more complex entities, while allowing boards scope to recover remuneration for up to four years after it has vested.
This will ensure executives have “skin in the game” for longer, and will allow boards to adjust remuneration downwards if problems emerge over an extended horizon.
Boards must also approve and actively oversee remuneration policies for all employees, and regularly confirm they are being applied in practice to ensure individual and collective accountability.
A three-month consultation period will close on October 22 and APRA intends to release the final prudential standard before the end of 2019, with a view to it taking effect in 2021.
“We recognise that some aspects of this proposal are far-reaching and will require major changes to industry practices,” Mr Lonsdale said.
“APRA will listen closely to feedback from impacted stakeholders to determine if our proposed approach is correctly calibrated to achieve its intended outcomes.”