APRA released the results of a review that scrutinised executive remuneration practices of 12 major Australian institutions across the deposit-taking, insurance and superannuation industries yesterday.
Remuneration structures provide insight into the risk culture and risk management of an organisation, the review stated.
The way senior executives are rewarded and “the extent to which risk-taking is explicitly considered in remuneration decisions” are key factors in risk culture, it said.
APRA’s review, which examined whether the 12 financial institutions were meeting APRA’s guidelines and how they were implementing them, found the organisations lacking.
“The review found that remuneration frameworks and practices across the sample did not consistently and effectively meet APRA’s objective of sufficiently encouraging behaviour that supports risk management frameworks and institutions’ long-term financial soundness,” it said.
Each of the 12 major institutions were found to have “satisfied the minimum requirements of APRA’s prudential standards”.
However, the review indicated that frameworks “often fell short of the sound practices set out” in APRA’s guidance “and were therefore some way from better practice”.
Commenting on the review, APRA chairman Wayne Byres said in a statement that institutions should re-evaluate their frameworks and policies.
"Both the design and implementation of performance-based remuneration must support effective risk management and the long-term financial soundness of each institution,” Mr Byres said.
“In this regard, there is considerable room for improvement.”
The review identified four areas that needed to be strengthened:
- ensuring practices are adopted that are appropriate to the institution’s size, complexity and risk profile;
- the extent to which risk outcomes are assessed, and weighted, within performance scorecards;
- enforcement of accountability mechanisms in response to poor risk outcomes; and
- evidence of the rationale for remuneration decisions.
“APRA does not believe institutions should be satisfied with simply meeting the minimum requirements on remuneration,” Mr Byres said, urging company boards and senior executives in particular to consider the review findings and take action.
"Well-targeted incentive schemes and firmly enforced accountability systems should be viewed not simply as a matter of regulatory compliance but as essential for sustained commercial success.”
The review signalled that the prudential regulator would further consider ways in which to strengthen its prudential framework, as well as indicating an additional review that would take into account the Banking Executive Accountability Regime (BEAR) as well as international best practice.
