Australia's prudential regulator has found considerable room for improvement in the design and implementation of large financial institutions' executive remuneration structures.
In its latest report, the Australian Prudential Regulation Authority (APRA) said the remuneration frameworks and practices of large financial institutions did not consistently and effectively promote sound risk management and long-term financial soundness, and fell short of the better practices set out in APRA’s existing guidance.
These findings were based on APRA's detailed analysis of executive remuneration practices and outcomes from a sample of 12 regulated institutions across the authorised deposit-taking institutions (ADIs), insurance, and superannuation sectors.
Wayne Byres, APRA chairman, said all APRA-regulated institutions are urged to review their remuneration frameworks and address any areas where APRA's 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,” Byres said.
The report revealed deficiencies in the following areas:
In response to the findings, APRA said it will consider ways to boost its prudential framework, and will take account of the forthcoming Banking Executive Accountability Regime (BEAR), as well as international best practice, in its future review of the relevant prudential standards and guidance.
"APRA does not believe institutions should be satisfied with simply meeting the minimum requirements on remuneration,” Byres said. “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. Boards and senior executives should consider the findings of this review and take action to better align their remuneration arrangements with good risk management and the long-term soundness of their institutions."
