APRA’s ten dimensions of executive remuneration

In this speech, John Trowbridge, APRA Executive Member, explains the context of the executive remuneration debate generally and positions APRA’s approach within the wider debate as a prelude to its forthcoming discussion paper relating to regulated financial institutions.

He referred to ten dimensions of executive remuneration:

“1. Application
APRA’s requirements will apply to prudentially regulated institutions only. By way of contrast … ASIC’s requirements apply to all registered corporations and the ASX requirements apply to all listed corporations.
2. Scope
Within each regulated institution, APRA will take an interest in all personnel whose decisions can have a material effect on the financial performance of the organisation. It will therefore cover senior executives and may also cover some or all sales staff, traders and other personnel. Other regimes may have a more restrictive scope, for example senior executives only.
3. Emphasis
APRA’s emphasis will be on the structure of remuneration rather than on its quantum. [APRA’s] interest is related to the management of risk and [it is] keen to see that incentive payments do not encourage excessive or inappropriate risk taking by executives. APRA does not see itself as the guardian of any public assessment of whether pay levels themselves in some organisations are judged to be too high.
4. Format
…APRA and other prudential regulators have the ability to hold company boards directly accountable for their remuneration arrangements. Accordingly [it] can operate by applying enforceable prudential principles. Some other agencies, for example ASIC and ASX, need to rely primarily on compliance with regulatory prescription, while others such as the AICD and ASA are not in a position to go beyond published guidance.
5. Accountability
Accountability under APRA’s prudential approach will be through … supervisors actively reviewing each institution’s remuneration arrangements. By comparison, accountability under the Corporations Act (administered by ASIC) is based on compliance with disclosure requirements and for the ASX it is a combination of disclosure and non-binding shareholder votes.
6. Governance
APRA will be requiring each company’s board and remuneration committee to govern the remuneration practices of the company. APRA already has various standards around the competence and independence of the board and will be extending these standards into the remuneration domain. In other regimes it is usually not possible to hold the board directly responsible in this way, thereby leaving the board with greater discretion as to how it conducts the remuneration affairs of the company.

Remuneration Structure
7. Components
Remuneration can usually be subdivided into three elements, namely fixed pay, short term incentive payments (STI) and long term incentive payments (LTI). APRA will be taking an interest in all three.
8. Risk adjustment
APRA will be requiring incentive payments to be adjusted for risk. Such adjustments have not generally been required by regulators or other agencies in the past. …
9. Time horizon
Extending the calculation of incentive payments over multi-year periods, and deferring bonus payments and the vesting of bonuses for several years, is usually a sound and transparent technique for making risk adjustments. APRA will generally be expecting eligibility for and assessment of bonus payments to go beyond one year.
10. Performance measurement
Performance measurement refers to the form and the metrics of incentive or bonus calculations. APRA will be offering some guidance around such matters as rewards in the form of cash, shares, share options and the like. [It] will also be offering some guidance on calculation methods, which can range from simple percentages of fixed pay to complicated formulae based on various measures of profitability and economic value added or economic capital models.”

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