Guerdon Associates suggests solutions to APRA draft regulation problems

APRA has telegraphed that finalisation of remuneration regulation is the priority for 2021 (see HERE) and it is likely that CPS511 will be first out of the gate.

However, judging from the second draft regulation, there are still significant issues to overcome (see HERE). While we acknowledge the welcome refinements to the first draft of the regulation, including a less prescriptive approach to non-financial performance hurdles, some issues need to be addressed:

1. The ability to circumvent deferral requirements by limiting or reducing the value of variable remuneration (VR) in an executive’s package This will be easier for non-listed entities not subject to shareholder say on pay vote prescriptions. Therefore it creates an uneven playing field for talent stacked against listed entities.  We made this same point in regard to the initial draft BEAR legislation, which was subsequently changed consistent with our suggestions (see HERE and HERE). This is overcome in the BEAR legislation by referencing a minimum deferral threshold in the context of total remuneration;

2. The definition of variable remuneration includes pay subject to a time objective. This would capture cash salary, as it is paid by the hour. APRA still has not cracked a workable definition. We do not think a workable variable remuneration definition to include time or service based deferred pay is possible. Instead, we suggest a more easily understood, administered, and universally applicable solution;

3. Fifty percent of incentive pay contingent on non-financial measures has been replaced by the word ‘material’. This is not defined. In any case, it will end up as being prescriptive as the prior version if it was. More importantly, it fails to acknowledge the different contexts for VR measures, and may inadvertently contribute to pay frameworks that, for the time and place, are contrary to sound prudential management. We suggest “balance” in lieu of “material”, and including pay outcomes as part of stress test assessments required of all significantly financial institutions (SFIs) to determine if the balance is right;

4. The concept of each component of VR having to have material weight of non-financial measures is unnecessarily prescriptive and assumes each component does not have a specific focus. In most cases separate components of variable remuneration, such as STI, LTI, malus, modifiers, gateways, deferrals etc. have a specific purpose, and it is the sum of these working together that balance and manage risk of both the financial and non-financial variety;

5. The necessity for sound remuneration governance has not been adequately addressed. While CPS 520 requires independent remuneration committee members, this draft of CPS 511 suggests that they need only rely on conflicted advice. This is an easy fix; and

6. How the transition from non-SFI to SFI status will be managed.

Guerdon Associates addresses each of these topics along with suggested solutions in our submission which can be accessed HERE.

© Guerdon Associates 2021
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