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APRA revises proposed rules on executive pay after feedback from industry

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    The Australian Prudential Regulation Authority (APRA) has revised proposed rules regarding executive remuneration from bonuses in the banking sector.

    In the revised draft of the proposal, APRA scrapped the 50% cap on bonuses bank executives can receive from the financial performance of their companies, replacing it with “a requirement that material weight be assigned to non-financial measures.”

    The regulator also reduced the minimum deferral periods for variable remuneration from seven to six years for chief executive officers; from six to five years for senior managers; and from six to four years for “highly paid material risk takers.”

    The deferral period was a way to deter executives from prioritising short-term profit over the long-term financial health of their organisations.

    While the two rules were recommended by the Hayne royal commission, the regulator said that the revisions respond to “industry feedback from the initial consultation.”

    “APRA’s revised standard on remuneration is deliberately principles-based to provide boards with flexibility to tailor remuneration frameworks to their entities,” said John Lonsdale, deputy chair of APRA. “However, with this flexibility comes an obligation that boards actively oversee remuneration policies for employees and ensure that there are appropriate consequences when people fail to meet expectations.”

    “The standard is designed to promote effective risk management that aligns the interests of customers, shareholders, and the broader community, to deliver high performance in a sustainable manner.”

    The new draft is open to consultation until February 12, 2021. It is scheduled to be finalised in mid-2021 and come into effect in early 2023.

    Last year, the Australian Institute of Company Directors (AICD) heavily criticised the imposition of a 50% cap on financial metrics across all variable remuneration, calling it a “blunt instrument that undermines the board’s role in setting remuneration structures that are tailored to the needs of their organisations.”

    The AICD also said that the deferral periods are “at odds with our understanding of international practice and is not sufficiently sensitive to differences in entity risk profile and strategy.”

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