The Australian Prudential Regulation Authority (APRA) today released the results of a review of remuneration practices at large financial institutions which found considerable room for improvement in the design and implementation of executive remuneration structures.
The review examined whether policies and practices in regulated institutions were meeting the objectives of APRA’s prudential framework: that remuneration frameworks operate to encourage behaviour that supports risk management frameworks and institutions’ long-term financial soundness.
APRA's review comprised detailed analysis of executive remuneration practices and outcomes from a sample of 12 regulated institutions across the authorised deposit-taking institutions (ADIs), insurance and superannuation sectors. The sample of institutions reviewed collectively accounts for a material proportion of the total assets of the Australian financial system.
The review found that remuneration frameworks and practices did not consistently and effectively promote sound risk management and long-term financial soundness, and fell short of the better practices set out in APRA’s existing guidance.
Chairman Wayne Byres said APRA encouraged all regulated institutions to review their remuneration frameworks and address any areas where APRA’s findings indicated room for improvement.
"Both the design and implementation of performance-based remuneration must support effective risk management and the long-term financial soundness of each institution. In this regard, there is considerable room for improvement," Mr Byres said.
The report identified the need for improvement in:
- ensuring practices were adopted that were appropriate to the institution’s size, complexity and risk profile;
- the extent to which risk outcomes were assessed, and weighted, within performance scorecards;
- enforcement of accountability mechanisms in response to poor risk outcomes; and
- evidence of the rationale for remuneration decisions.
In response to the findings, APRA will consider ways to strengthen its prudential framework. A future review of the relevant prudential standards and guidance will take account of the forthcoming Banking Executive Accountability Regime (BEAR), as well as international best practice.
Mr Byres said: "APRA does not believe institutions should be satisfied with simply meeting the minimum requirements on remuneration.
"Well-targeted incentive schemes and firmly enforced accountability systems should be viewed not simply as a matter of regulatory compliance but as essential for sustained commercial success.
"Boards and senior executives should consider the findings of this review and take action to better align their remuneration arrangements with good risk management and the long-term soundness of their institutions."
Any revisions to the prudential framework will be subject to APRA’s usual practices of stakeholder consultation and engagement.
You can read the information paper on Remuneration practices at large financial institutions on the APRA website.