Banker bonuses targeted in latest regulatory crackdown
The financial regulator is attempting to tackle the industry's cultural problems by overhauling senior bankers' pay packets, proposing new limits on the role of profit-driven targets in determining executive bonuses.
In response to recommendations from the Hayne royal commission into financial misconduct, the Australian Prudential Regulation Authority (APRA) on Tuesday released draft rules that will place new restrictions on how senior staff are paid in banks, insurance companies, and superannuation funds.
Under the changes, APRA said financial performance measures would not be allowed to comprise more than 50 per cent of the criteria for what the industry calls "variable remuneration," but is more commonly known as a bonus.
The new rules are intended to force banks to put more emphasis on non-financial targets, such as customer satisfaction, instead of profit-driven targets such as return on equity or total shareholder returns.
APRA will also force top executives to wait longer until they receive bonuses awarded to them, and boards will also have a longer period to "claw back" pay after it has been issued.
The regulator proposed deferring the payment of senior executive bonuses in large institutions for longer periods of up to seven years, a move it hopes will give executives more "skin in the game." Boards would be able to "claw back" pay up to four years after bonuses had "vested," if problems arise years after the executive has been paid.
APRA's deputy chairman John Lonsdale said the changes would encourage executives to focus more on "non-financial risks," such as culture and governance.
“In the financial sector, APRA has observed an over-emphasis on short-term financial performance and a lack of accountability when failures occur, especially among senior management," Mr Lonsdale said.
"This has contributed to a series of damaging incidents that have undermined trust in both individual institutions and the financial industry more broadly. Crucially, from APRA’s perspective, these incidents have damaged not only institutions’ reputations, but also their financial positions.”
The proposed changes, which would be enshrined in a new prudential standard, would lead to significant changes in long-term bonuses, in particular.
APRA said the typical remuneration structure for a bank CEO was to have 100 per cent of their long-term bonus dependent on financial targets, and deferred for three or four years. Non-financial targets already typically make up 50 per cent of the targets for short-term bonuses, the regulator said.
Mr Lonsdale emphasised that the regulator was not determining how much bank employees were paid.
"Rather, we want to empower boards to more effectively incentivise behaviour that supports the long-term interests of their entities. By reducing the risk of misconduct, we hope to see better outcomes for customers and higher returns for shareholders in the long term," he said.
It comes after Westpac, National Australia Bank and ANZ Bank last year all received first "strikes' - a shareholder vote of more than 25 per cent against a company's remuneration report.
Senior bankers have previously warned they risk copping second strikes this year because some investors are opposed to "non-financial" targets. However, APRA said the new prudential standards would not take effect until 2021, following "appropriate transitional arrangements."