After releasing its consultation paper on executive remuneration on 28 May 2009, APRA received 51 submissions on the proposals and met with a number of regulated entities and industry groups.
As a result, on 7 September 2009 APRA released a response paper and re-drafted versions of the relevant guidelines and standards. The most important of these for remuneration practitioners is Draft Prudential Practice Guide 511 (PPG 511).
APRA acknowledges that remuneration is only one aspect of risk for financial services companies, and that the remuneration piece should only be pursued as one of the components of risk management.
APRA confirms that its proposals are consistent with Financial Stability Board (FSB) principles, and that even though there is uncertainty on how FSB principles will play out globally, it is proceeding in Australia.
A contentious issue is the inconsistency between APRA principles encouraging long-term deferral of bonuses and equity, including after employment ceases, and the government’s refusal to remove the requirement for taxation of equity no later than the date of cessation of employment. APRA basically tells companies they will have to work out for themselves how to deal with this mis-alignment, suggesting that companies release sufficient equity to enable payment of the applicable tax even though the performance test has not been satisfied at that point. As we have pointed out in previous articles (see HERE), this would have perverse consequences for performance/reward outcomes.
APRA took heed of submissions that Board remuneration committees should have a majority (rather than 100% composition) of independent NEDs. This is a good example of a consultation process leading to a better result.
Another area in which APRA responded to consultation was in relation to separation of remuneration practices for risk and control functional staff, as contrasted with “line” employees such as Traders and Bankers. The industry responses pointed out practical difficulties in definitions, in level of staff covered, and in having clear separation of roles in all cases. This enabled APRA to clarify that the rules should be applied with common-sense, with the definition changing to clarify that it relates to employees with roles primarily related to risk and control, and that the issue is to ensure that employees are not compromised in terms of independence by the remuneration practices (rather than requiring arbitrarily different remuneration practices).
Another area where APRA listened to the responses requesting clarification, but was not able or willing to spell out black letter guidelines, is in relation to defining “significant” remuneration. Companies just have to use judgement in this regard.
In an important clarification, APRA points out that organisations are not required to develop risk-based models (such as Economic Profit measurement) just for the purposes of incentive plans. These models may have merit in business management and if used for that can also be used in incentive assessment.
In the tangled area of “independent consultants and advisors” to organisations and remuneration committees, there was another win for common-sense when APRA pointed out it wants the reality of independence rather than just the form.
APRA is looking for final comments and will then finalise its documentation around 20 October.
We note that APRA commissioned a survey of its stakeholders (generally, not just in relation to current issues such as remuneration) and has publicised this survey on its website; the feedback was pretty good.
APRA seems to have done a good job with the drafting and the consultation process on this issue, consistent with the results of that survey.
The APRA package can be found HERE.© Guerdon Associates 2022 Back to all articles