ADI executive remuneration policies: draft governance standards

The APRA consultation package on new remuneration prudential standards proposes the extension of the current APS 510 by requiring the Board of each ADI to:

(a) have in place a Remuneration Policy that covers various matters including alignment of remuneration arrangements with the long-term financial soundness of the regulated institution and its risk management framework, and explains who is covered by the policy; and

(b) establish a Board Remuneration Committee comprised entirely of independent directors with the requisite skills and knowledge to perform its functions which, at a minimum, are to review the Remuneration Policy periodically and make recommendations to the Board on the policy and the remuneration of executives.

Subject to meeting APRA’s prudential requirements, regulated institutions have the flexibility to establish their remuneration arrangements in a manner best suited to achieving their business objectives.

APRA proposes that the Remuneration Policy cover, at a minimum, each person or group of persons within the regulated institution who, because of their roles, have the capacity to make decisions that could materially affect the interests of depositors and owners (shareholders or in the case of mutuals, members). For these purposes, APRA has specified certain persons who must be covered, namely ‘responsible persons’ (generally the senior executive cadre), risk and financial control personnel, and any other personnel who receive a significant proportion of variable remuneration through bonuses, commissions and the like.

APRA proposes to exclude non‑executive directors from those persons required to be covered by an institution’s Remuneration Policy.

APRA’s intention is that the extended prudential standards, once finalised, will commence in January 2010 but with appropriate transitional arrangements where necessary.

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