APRA chairman, Wayne Byres, expressed APRA’s high levels of frustration with board inaction on companies’ remuneration policies and culture in a recent speech.

The most critical component of Mr Byres’ address was directed at remuneration practices. From the tone of his address it is fair to say that APRA is not happy. Not happy at all.

Earlier this year APRA released the findings from the review of remuneration policies and practices across a sample of large APRA-regulated entities (see HERE). The review found that remuneration frameworks and practices across the sample did not consistently and effectively encourage behaviour that supports risk management frameworks and long-term financial soundness.

Basically, APRA is not happy with three aspects of banker pay:

• Outcomes. Employees at lower levels received downward adjustments to their remuneration, but these were not always matched by corresponding adjustments at an executive level to recognise overall line or functional accountability. APRA considered senior executives to be somewhat insulated from the consequences of poor risk outcomes. “This must change,” according to Mr Byres.
• Metrics. Measures by which performance was judged are too focused on shareholder metrics such as return on equity (RoE) and total shareholder return (TSR). APRA finds the current structure of long-term incentives in Australia to be particularly problematic in this regard, and considers it out of step with how best practices in remuneration are evolving internationally. “This will also have to change,” according to Mr Byres.
• Oversight. APRA believes Board Remuneration Committees (BRCs) have failed in their oversight of remuneration practices and frameworks. From insufficient challenge to insufficient documentation, it is “clear to APRA that stronger governance of executive remuneration is needed”.

Certainly, at least on remuneration, APRA has been entirely consistent on one thing since the GFC. It does not like, and has never liked, relative TSR. So, why one has to ask, do all banks place so much emphasis on relative TSR? The answer is primarily the excessive weight boards give to proxy advisers and institutional investors. Other stakeholders miss out – customers, employees, and even the executives themselves (who would rather be judged on aspects they have a direct influence on). To their credit, some of the larger banks have, belatedly, moved away from TSR. But it has not been easy.

APRA also does like not the excessive dependence on ROE. It would rather companies implemented ex-ante measures that incorporate a charge for risk. While included in annual incentives, not one Australian bank or insurer has incorporated such measures in LTI. This is despite APRA constantly noting ex-ante incentive measures as a preference (four times in speeches and public reports so far this year by our count).

APRA’s frustration is all too evident. To date it has been reticent to prescribe requirements (unless these were imposed by legislation such as BEAR – See HERE). It has confined itself to setting principles. Regulated entities need to start abiding by the principles, because it is not such a secret now that the motivation and pressure for regulators to wave big prescriptive sticks post Hayne is hitting new highs.

See Mr Byres’ address HERE.

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