The Australian Prudential Regulation Authority (APRA) is seeking feedback on a draft prudential standard that introduces stricter requirements on executive pay policies of Australia’s large banks, insurers, and retirement funds.
The proposal comes in the aftermath of the Hayne royal commission, which blamed the existing remuneration and accountability arrangements for the widespread misconduct in the financial services industry.
In a discussion paper released today for consultation, APRA proposed that financial performance should account for no more than 50% of performance criteria and that boards must oversee remuneration policies for all employees “to ensure individual and collective accountability.”
APRA also plans to impose a seven-year deferral period for variable remuneration for senior executives in larger, more complex entities, as well as allow boards to recover remuneration for up to four years after it has vested.
“Remuneration and accountability frameworks play an important role in driving employee behaviour,” said John Lonsdale, APRA deputy chair. “Where policies are poorly designed, or not followed in practice, companies may incentivise conduct that is contrary to the long-term interests of the company and its customers.”
Lonsdale said limiting the influence of financial performance metrics in determining variable remuneration will ensure executives have “skin in the game” for longer.
“We want to empower boards to more effectively incentivise behaviour that supports the long-term interests of their entities,” Lonsdale said. “By reducing the risk of misconduct, we hope to see better outcomes for customers and higher returns for shareholders in the long-term.”
The three-month consultation will close on Oct. 23, with the final prudential standard set to be released before the year ends.
