In a speech at the Financial Institutions’ Remuneration Group Annual Conference in Terrigal in September, APRA general manager David Lewis gave an evaluation of the Australian financial institutions on APRA’s remuneration governance standards.

 

Consistent with other APRA presentations, the main message was that Australian financial institutions under APRA regulations are doing well, but they can do better.

 

Mr Lewis highlighted four areas of remuneration governance that encompass APRA’s regulation framework. Below are his assessments of APRA-regulated companies with respect to these areas:

 

1-     Governance: Australian financial institutions are doing well as most have well functioning remuneration committees with a majority of independent directors and they seek independent advice from external sources. The only need for improvement that comes up is boundary issues where CEOs want to exert more control in executive remuneration than as a source of advise to the board.

 

2-     Coverage: For this category the regulated companies receive two “ticks” and one “cross”. While all institutions apply remuneration policies to senior executives and most incorporate risk and financial control personnel in their remuneration framework, ex-ante evaluations of material risk-takers’ remuneration with substantial performance-based elements leaves APRA wanting.

 

3-     Performance measures: Results vary greatly from institution to institution. APRA is concerned with excessive reliance on high-level metric such as share price or EPS as these are unable to measure individual performance and risk taking. APRA likes the low-level, tailored aspects of balanced scorecard approach, with a mix of individual performance metrics and qualitative assessment, that some regulated institutions utilize.

 

4-     Risk Adjustment: Once again, the regulated institutions receive mixed reviews for this category. On the plus side, almost all of them incorporate deferred elements in their STIs or LTIs. However, they are mainly used as retention mechanisms rather than APRA-preferred long-term risk management motivators. Mr Lewis states “[w]e are looking for a more serious re-evaluation of risk outcomes” instead of the common practice of withholding payment of unvested benefits only as a result of material instance of misconduct.  

 

 

The text of the speech can be found HERE.

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