In a recent speech APRA Chair Watne Byres made the following comments about executive remuneration and the Banking Executive Accountability Regime (BEAR):

“In the context of executive remuneration, I think there are a few aspects where the direction is pretty clear.

The first is metrics. The current system of executive remuneration based largely on the achievement of financial targets, including long-term incentives based primarily if not entirely on relative TSR [Total Shareholder Return], will have to change (indeed, the Royal Commission specifically recommended APRA impose a cap on the use of financial metrics for long-term incentives (LTIs)). From APRA’s perspective, we want to see remuneration based on a genuine and even balance of financial and non-financial considerations. We have yet to reach a view as to the right mix, but an obvious question for Boards is to ask themselves why 50:50 wouldn’t be a good starting point. And within whatever financial metrics are used, I’d argue there should be more than a single, share-price based metric. That would mean TSR would go from the primary, if not sole, determinant of LTIs to something less than 25 per cent.

The second aspect is discretion. Boards have a responsibility to ensure executive remuneration is appropriate. Given the complexity and nuance involved in performance assessment, that means more Board discretion, not less. That is, both more discretion in rewarding, and more discretion in judging whether rewards should ultimately vest. Totally formulaic approaches with high leverage that some investors seem to favour are not going to cut it in the future. That will also probably also require more transparency about decision-making, which is no bad thing.

The third aspect is malus and clawback….it would be disappointing if the industry viewed the minimum deferral requirements of the BEAR as the default. Disappointingly, that is what seems to have largely happened. We will be examining the case for longer deferrals, at least in some instances, to better align vesting with the emergence of risks. In addition, the Royal Commission recommended APRA require additional clawback arrangements. Many Boards argue that it is very difficult to make clawback work in practice. That may well be, but if so it won’t be the case of simply going without – longer deferral and malus periods, possibly combined with post-vesting holding locks, might be needed to compensate.”