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BFCSA: Bankers fear more strikes in exec pay 'showdown'

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Bankers fear more strikes in exec pay 'showdown'

Sydney Morning Herald April 11, 2019 12.00am

Clancy Yeates and Mathew Dunckley


EXCLUSIVE  Banks face a fresh showdown with shareholders over executive pay and risk copping second "strikes," senior bankers warn, after the regulator urged boards to put less weight on financial targets when paying bonuses.

In an attempt to improve bank culture, the Australian Prudential Regulation Authority (APRA) is expected to propose restrictions on bank executive pay in the coming weeks. Chairman Wayne Byres last month signalled it would be calling on boards to give more consideration to non-financial factors such as customer outcomes when determining bonuses, as recommended by the royal commission.

But senior bankers have told the Sydney Morning Herald and Age such a change is likely to be resisted by key investors, some of whom have previously worried that non-financial targets can be more easily “gamed.” The bankers' warnings were played down by institutional investors and proxy advisers, who insisted they were not opposed to non-financial targets, provided these were transparent and justified.

The debate comes after National Australia Bank, Westpac, and ANZ Bank received first "strikes" of more than 25 per cent against their remuneration reports last year. Another strike this year at any of these banks would trigger a vote on whether to spill the board.

"It is very difficult. We are heading for a bit of a showdown,” said one senior banking source. The source said satisfying APRA and shareholders was a difficult task because “you are never going to get everyone to agree”.

The senior banker said there was a risk in regulators effectively making decisions on behalf of companies. “APRA is entitled to their opinion but — unless there is regulation — it is a matter for the shareholders,” they said.

Another senior source said they understood where the regulator was coming from, as an investor "obsession" with linking pay to total shareholder returns was "dangerous" because of the behaviour it could lead to inside banks. But they raised concerns some of the biggest investors in major banks were unlikely to support the regulator's proposal to put more emphasis on non-financial targets.

"It's going to take a lot of effort to find a solution that will meet APRA's requirements and avoid a second strike," they said. "Three banks could face a second strike," they said.

Each of the banks is likely to hold detailed meetings with shareholders over the coming months, in an attempt to find common ground. Commonwealth Bank avoided a strike last year after slashing executives' bonuses.

The looming debate comes as investors are also calling on bank boards to exercise more discretion in paying out multimillion-dollar bonuses to senior bankers.

PwC remuneration specialist Emma Grogan said investors were unhappy there had been "insignificant consequence in situations were the banks were suffering severe reputational damage". She said bank boards were in "difficult position" because of the wide divergence in views on executive pay.

"Across the different stakeholder groups there are hugely divergent views between regulators, proxy advisors, investors... it is a very difficult time to arrive at a consistent forward for all of those stakeholders," she said.

Ms Grogan said any new APRA standards could well not be in place before the next round of bank shareholder meetings meaning the companies could have time to mollify investors before having to meet new regulatory requirements.

Governance expert Dean Paatsch, of Ownership Matters, said APRA's perspective on bank executive pay was "breathtakingly naive," but it was "completely unrelated" to the risk of banks incurring more "strikes" later this year.

The main point of controversy in Mr Byres' comments was his assumption that a greater emphasis on non-financial targets would solve the problem, he said.

Head of investment stewardship at Vanguard, Glenn Booraem, said the fund would consider APRA's proposal. It thought "performance-linked remuneration policies" were "fundamental" drivers of value, but the more important debate was to support long-term remuneration structures over short-term targets, he said.

The executive manager of governance and engagement at the Australian Council of Superannuation Investors, Ed John, said non-financial measures were already in the remuneration mix, but they had not always had the intended effect on culture. 

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