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BFCSA: APRA to dictate banker pay - Good Luck with that!

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APRA to dictate banker pay

Australian Financial Review Mar 27, 2019 4.43pm

Jonathan Shapiro, James Fernyhough, John Kehoe


Australian Prudential Regulatory Authority chairman Wayne Byres has been forced to dictate how banker bonuses are set after boards failed to design structures to better align the interests of management and customers.

Mr Byres said it was "inevitable that regulatory intervention," would  be needed to "shift practices" as he told boards they needed to stop setting bonuses based solely on total shareholder return, use more discretion in handing out bonuses and demonstrate a greater willingness to claw back payments.

He told The Australian Financial Review Banking & Wealth Summit that his demand, a year ago, that bank boards work to restructure the executive pay packets of their senior bankers, had "not been wholly welcomed".

APRA, which has just received a $150 million boost to its budget, said it will being consulting on revisions to current prudential standards by the middle of the year but said there was clear direction on certain aspects of executive remuneration.

TSR 'will have to change'

He said the use of financial targets and in particular total shareholder return to set long term incentive bonuses "will have to change"

Mr Byres said APRA wanted to see a more even balance of financial and non-financial considerations, and suggesting a 50:50 mix would be a "good starting point".

He also suggested financial metrics be expanded beyond total shareholder return so that it was no longer the primary determinant of bonuses.

Mr Byres also flagged that APRA would be more demanding of banks to implement claw backs of bonuses.

He said he was disappointed that most banks defaulted to the minimum federal requirements of the Banking Executive Accountability Regime.

"We will be examining the case for longer deferrals, at least in some instances, to better align vesting with the emergence of risks."

ANZ chief executive Shayne Elliott said there were "pros and cons" with various remuneration systems and predicted that bonuses would be paid based on the performance of a particular team.

"I'm not sure it's about the maths," Mr Elliott said at a parliamentary inquiry in Canberra.

"It depends on what the variable [remuneration] is paid for, as much as how much it is."

Mr Elliott said ANZ's "Reimagining Reward" remuneration project was aiming to better align pay to customer outcomes and the details will be unveiled after October.

"Essentially what that will a significant shift towards more fixed pay and less variable. The variable will be much more team based than individual."

Two-strikes debate

He stuck by his comments made in the witness box at the banking royal commission that the “two strikes” regime in which shareholders can vote down directors, had an important role.

A former APRA staffer Fahmi Hosain told the Summit on Tuesday that the "two strikes" rule should be dropped, arguing it gave shareholders "huge sway" and was preventing boards from making the necessary changes to remuneration.

When asked whether the "two strikes rule" should remain in place, Mr Byres said he would not deviate from his position when he asked the same question at the royal commission in November.

He said the two-strikes rule was an important way for shareholders to “express dissatisfaction” with banker pay.

Under the two-strikes rule, when more than 25 per cent of shareholders vote down two annual remuneration reports in a row, it triggers a vote on a board spill that could result in the company's entire board of directors facing re-election.

Anna Bligh, the chief executive of the Australian Bankers Association, was non committal on whether the two-strikes rule should be maintained.

But she said the rule related more to corporate governance than appropriate pay structures.

“When shareholders want to let boards know that they are unhappy with some aspect of performance it’s almost as if that is the only avenue they have.”

 “So sometimes I wonder whether all of the votes against a rem report are about rem, or whether in some cases they are actually an expression of concerns about other failures they perceive in the company.”

Mr Byres also rejected suggestions that short-term bonuses should be scrapped altogether, because "incentives were not the problem."

“They are a way of rewarding good behaviour so I think they have a role to play.”

“From our perspective we are much more focused on the design and what behaviour it is incentivising rather than just saying any incentive is bad in of itself."

He added that incentives extended beyond remuneration, to which staff got promoted, given opportunities and training.

“If there was a prohibition on short term incentives, I suspect the issue would bubble up in some other form.”

Mr Byres also said boards needed to show more discretion in deciding whether or not to hand out bonuses.

"Totally formulaic approaches," he said are "not going to cut it in the future."

"That will also probably also require more transparency about decision making, which is no bad thing."


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