“We found it too easy for financial pilots, unlike those who actually take to the sky, to walk away from the scene of an accident unscathed,” Mr Byres said.
The royal commission recommended APRA impose a cap on the percentage of an executive’s remuneration that can be determined by purely financial metrics, such as profit or shareholder return, as opposed to “non-financial considerations”, including culture and customer outcomes.
“We want to see remuneration based on a genuine and even balance of financial and non-financial considerations,” Mr Byres said.
“We have yet to reach a view as to the right mix, but an obvious question is for boards to ask themselves why 50:50 wouldn’t be a good starting point.”
Furthermore, financial metrics needed to go beyond one single indicator linked to share values. Combined, “that would mean total shareholder return would go from the primary, if not sole, determinant of long term incentives to something less than 25 per cent”, Mr Byres said.
Boards should also be required to exercise more ‘discretion’ in evaluating the performance of their executives, Mr Byres said.
“Totally formulaic approaches with high leverage that some investors seem to favour are not going to cut it in the future.”
This would require greater transparency around board decisions “which is no bad thing”, he said
Finally, Mr Byres said recent government reforms to force executives to wait longer before receiving their full payouts did not go far enough.
“We will be examining the case for longer deferrals, at least in some instances, to better align vesting with the emergence of risks,” Mr Byres said. In line with another recommendation of the Royal Commission, APRA was also looking at more ‘clawback’ provisions in pay structures.
Overall, Mr Byres warned the regulator would be “less patient with co-operative institutions” in the wake of the Commission.
Following a damning APRA review of the internal structures of Commonwealth Bank last year, which found financial success had “dulled the senses” of the bank, Mr Byres said a further 36 financial institutions had been asked to conduct a formal “self-assessment”.
While banks and insurers had responded “fairly diligent in most cases”, superannuation trustees had shown less interest in the exercise.
“Superannuation trustees tended to utilise a ‘lighter touch’ process, often justified on the basis that the problems in CBA couldn’t apply to them,” Mr Byres said. However, “I’d urge some caution against that conclusion,” he said.
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.