In our September newsletter (see HERE), we provided an outline of the major changes now that the August 2021 final regulation has been crafted.
Following the regulation being finalised APRA has published its draft “practice guide” – CPG 511.
The practice guide has a number of helpful clarifications including:
- Reinforcing that the RemCo must consult the Board Risk Co and CRO to ensure that risk outcomes are appropriately reflected in remuneration outcomes for persons in specified roles.
- ‘Good practice’ (i.e., recommended practice) being clear quantitative and qualitative assessments for measures and key metrics and how those assessments flowed to remuneration outcomes i.e. document the why resulting in the what of adjustments leading to remuneration outcomes. Reporting is now documented as a key component of the remuneration framework.
- The regulation’s deferral requirements for variable remuneration (VR) are for ‘at least’ a fixed percentage over a ‘minimum’ period. This suggests entities could go beyond these requirements.
- The guide introduces ‘consideration’ by prudent entities as to whether material risk-takers with remuneration close to but less than the $1 million dollar mark should be subject to deferral. This assumes that they also have VR, as deferral only applies to VR. We have noted before that some organisations may decide that it is all too hard and not have any variable remuneration. APRA’s Wayne Byers had remarked in a 2018 speech (see HERE) that an opportunity would be lost if “everyone just defaults to the minimum” under BEAR as regards percentage of VR deferred and timeframes. That was then. Given the longer deferral requirements of CPS511 we expect that the market will remain cautious and work within the regulation’s “minimum”. If an entity acted otherwise it would be difficult to attract and retain key employees. It would be interesting to see if entities receive APRA criticism following CPS511’s implementation for only applying the minimum stipulated requirements.
- A ‘prudent board’ would also document clear guidelines with respect to the weighting of non-financial measures in the determination of VR. The balance of financial and non-financial measures received a lot of attention in the market submissions. APRA has responded by moving away from the prescriptive balance to stipulate a ‘material’ weight given to non-financial measures. It seems that the challenge of defining material has been handed back to the individual entities who will have to document their approach and test and demonstrate that it is working as intended.
- There is a handy example in the guide as to how to meet the deferral requirements from a combination of VR plans, STI plus LTI being the familiar combination. If you had not already seen the opportunity, the guide illustrates how you can maximise the cash in the current year from STI outcomes if the LTI satisfies the majority of the threshold deferral value. Amongst the large ADI’s it is a common approach to defer 50% of the STI as equity which may no longer be “needed”, at least for compliance purposes.
- In the area of remuneration adjustments, APRA reinforces the role of adjustments in “less severe circumstances as an effective deterrent”. We think this means downward adjustments for immaterial, relatively small matters.
- The guide also makes clear that an individual’s contribution to an adverse outcome including inaction should be considered. The focus of the guidance in combination with the need to document decisions, indicates that APRA will be examining the area of consequence management closely.
- The guide also addresses the challenge of service providers whose remuneration arrangements present conflicts or risks, providing a number of possible tools as mitigants. The final draft of CPS511 and the updated guide have gone a long way in addressing the concerns with the original drafting, given that regulated entities have no control over the policies and practices of service providers.
The October 2021 draft of the CPG511 can be found HERE.© Guerdon Associates 2022 Back to all articles