In the months that followed Mr Byres said there was considerable opposition to the proposal which he found “disappointing”. Investors found the proposal “airy fairy” and proxy firms disliked the emphasis on non-financial measures.
By late 2020 the prudential regulator had capitulated and replaced the hard cap on financial metrics with a requirement that a “material weight be assigned to non-financial measures” as well as reducing the minimum deferral periods by either one or two years.
Under the new guidelines, which are non-binding, APRA singles out various roles it expects the proposal to apply to including highly paid material risk takers and material insurance underwriters.
It also said the new rules should capture “specified roles” such as executive directors,
senior managers and all risk and financial control personnel, saying this may extend below the ranks of group executives who typically report to the CEO.
A 2019 information paper found that executives had been granted an average of 96 per cent of their full short term incentives over the five years between 2012 and 2016, compared with 74 per cent over 2017 and 2018. The latter years were a period of increased scrutiny for banks and included the CBA/AUSTRAC matter and the Hayne royal commission. APRA wants boards to stop rubber stamping bonuses.
The goal is to create “stronger incentives for individuals to manage proactively risks”, to deliver “appropriate consequences for poor risk outcomes” while also contributing to “increased transparency and accountability on remuneration.”
That will include the ability to show some foresight in periods where there have been poor returns, bad conduct, an erosion of regulatory capital or significant government support.
“It is important that the board uses its discretion in a timely manner, rather than acting only on the basis of realised outcomes. For example, it could be appropriate for a board to reduce pre-emptively variable remuneration during a period of stress, rather than waiting for losses to be realised.”
Late in 2021 there will be new disclosure requirements which will compel institutions to explain how the incentives were designed, the reasons for weightings chosen, more detail on highly paid material risk takers and circumstances where consequence management was applied with how much was forgone and why.
Under the timeline provided by the regulator the final prudential standard and the final prudential guidance for 511 will be released in the second half of this year to be implemented in 2023. The regulator has said it does not expect to make any material changes to current proposals as they stand.