APRA chairman Wayne Byres reveals flaws in banker pay
Australian Financial Review Apr 4 2018 12:06 PM
Jonathan Shapiro
The chairman of the prudential regulator says pay structures of executives at the nation's largest institutions have allowed them to avoid punishment for poor outcomes, undermining efforts to ensure financial stability.
The "carrots are large and the sticks are brittle" for senior executives, Australian Prudential Regulation Authority chairman Wayne Byres told The Australian Financial Review Banking & Wealth Summit as he announced a review executive remuneration of 12 financial institutions.
"Not only are rewards generous, but there are seemingly few repercussions for poor outcomes," he said in a keynote address.
The review covered 280 senior roles across the banking, insurance and superannuation sectors between 2014 and 2016.
Mr Byres said there was "considerable room for improvement".
Lack of accountability
"There has been limited evidence of material financial consequences for senior executives when risk outcomes have been poor in their area of responsibility," he said
Mr Byres said he was "personally surprised" by some of the findings that showed a lack of accountability to develop sound risk practices.
Employees below the senior executive level often bore the brunt for poor risk conduct but it "was less common to see corresponding adjustments at an executive level recognising overall line or functional accountability.
"That is not to imply there should be a one-for-one adjustment in each and every case. But overall, senior executives seemed somewhat insulated from the consequences of poor risk outcomes."
The review, he said, "suggests the current state of affairs is not always delivering a sufficiently strong alignment between remuneration and good risk management".
Stronger role for boards on compensation
He said executives needed more skin in the game while deferral periods would be extended to ensure decisions were made for the long term.
Boards also needed to play a stronger role in overseeing executive compensation and "not be afraid to firmly exercise their discretion when events warrant it".
"It's not that hard to do better and we should do better," he said in response to questions.
The comments come as the banks grapple with the introduction of the Banking Executive Accountability Regime (BEAR) in which regulators will implement measures to pay packages to ensure senior bankers are more accountable for their actions.
Mr Byres said it would be a "pity" if banks didn't use the BEAR as a chance to redesign compensation structures to better align long-term performance and risk management.
'Holistic view' of performance
"It's not about heavy-handed punishment," he said.
"It is not about heads on sticks on those things but it's trying to make sure that when remuneration decisions are taken and variable compensation is decided upon, that there's a holistic view of performance."
In his address, Mr Byres acknowledged banking executives' decisions were partly a function of external stakeholders such as shareholders demanding institutions grow profits.
He described a shareholder strike against a remuneration package that considered non-financial factors, presumably a decision to vote down the Commonwealth Bank's package, as "disappointing".
"We still have a set of arrangements where the financial perspective dominated all other consideration and it would be better for everyone if this was broader," he said.
Incentives for middle men
He took exceptions to the comment of one investment manager who said staff engagement and customer satisfaction was "part of the job" and didn't warrant rewards, pointing out that growth and profit was also part of the job.
But it also highlighted that the explanation for growth and profit-based incentives as being a demand of shareholders may not be entirely true either.
While the broader community owned shares in the banks, Mr Byres said the incentives of middle men had more of an impact on the actions of bank executives to hit profit targets.