April 04, 2018

APRA released the results of a review of remuneration practices at large financial institutions. The findings reveal considerable room for improvement in the design and implementation of executive remuneration structures.

The review found that remuneration frameworks and practices did not consistently and effectively promote sound risk management and long-term financial soundness; they fell short of the better practices set out in the existing guidance of APRA. The report identified the need for improvement in:

  • Ensuring practices were adopted that were appropriate to the size, complexity, and risk profile of an institution
  • The extent to which risk outcomes were assessed, and weighted, within performance scorecards
  • Enforcement of accountability mechanisms in response to poor risk outcomes
  • Evidence of the rationale for remuneration decisions

Chairman Wayne Byres said APRA encouraged all regulated institutions to review their remuneration frameworks and address any areas where the findings indicated room for improvement. "Both the design and implementation of performance-based remuneration must support effective risk management and the long-term financial soundness of each institution. In this regard, there is considerable room for improvement," Mr. Byres said. In response to the findings, APRA will consider ways to strengthen its prudential framework. A future review of the relevant prudential standards and guidance will take account of the forthcoming Banking Executive Accountability Regime (BEAR) as well as the international best practices. Any revisions to the prudential framework will be subject to APRA’s usual practices of stakeholder consultation and engagement.

The APRA review comprised detailed analysis of executive remuneration practices and outcomes from a sample of 12 regulated institutions across the authorized deposit-taking institutions, insurance, and superannuation sectors. The sample of institutions reviewed collectively accounts for a material proportion of the total assets of the Australian financial system.

 

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Keywords: Asia Pacific, Australia, Banking, Insurance, Remuneration, Best Practices, APRA

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