APRA’s tough new proposals on executive remuneration

The boards of financial services companies, including some superannuation funds, will have up to four years to recover remuneration from recalcitrant senior executives, under new proposals put forward today by the Australian Prudential Regulation Authority (APRA).

Under the arrangements, APRA wants the minimum deferral periods for variable remuneration of up to seven years introduced for senior executives in larger, more complex entities, with the boards having scope to recover remuneration for up to four years after it has vested.

As well, the regulator wants to ensure that financial performance measures comprise no more than 50 per cent of performance criteria for variable remuneration outcomes.

 The measures are contained in a discussion paper released today ahead of a proposed new prudential standard APRA says is aimed at better aligning remuneration frameworks with the long-term interests of entities and their stakeholders.

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It said the proposed reforms addressed recommendations contained in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Commenting on the proposals, APRA deputy chair, John Lonsdale said it was clear that existing remuneration arrangements in many entities were not incentivising the right behaviours.

“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,” he 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.”

“Limiting the influence of financial performance metrics in determining variable remuneration will encourage executives to put greater focus on non-financial risks, such as culture and governance. As our recent response to the industry self-assessments made clear, this remains a weak spot in many financial institutions,” Lonsdale said

He said introducing the minimum holding periods for variable remuneration ensured executives had ‘skin in the game’ for longer, and allowed boards to adjust remuneration downwards if problems emerged over an extended horizon.