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On 23 July, 2019 APRA released a discussion draft: “Strengthening Prudential Requirements for Remuneration” in regulated Financial Services entities. The proposed new prudential Standard (CPS 511) is a direct result of recommendations from the Hayne Royal Commission. Specifically the Final Report highlighted that the structure of executive remuneration, and the KPIs driving STIs and LTIs, was implicated in the misconduct that the Royal Commission uncovered.
In drafting its proposed new, stand alone standard, APRA looked to overseas jurisdictions for sound practice including regulatory frameworks in place in the US, UK, Europe and Canada. There are a number of specific changes proposed by APRA:
A strengthening of governance oversight of remuneration policy and outcomes for executives (and other staff) with direct board involvement in KPI assessment for executives and greater focus on risk related outcomes.
A requirement that financial metrics make up no more than 50% of the KPIs driving STI and LTI schemes.
60% of CEO variable reward to be deferred for a minimum of 7 years from the date of the award with pro-rata vesting after 4 years. For other executive,s 40% of variable reward is to be deferred for 6 years with pro-rata vesting after 4 years.
Clawback for up to 2 years beyond full delivery and 4 years for a person under investigation (presumably for some form of misconduct or breach of the BEAR).
These provisions are to apply regardless of whether an executive remains employed by the institution or not.
As it stands the APRA Draft Standard, whilst well intentioned, has a number short comings. With over 30 years experience working at board level on matters of executive remuneration we have some expertise to share. Our views have been submitted to APRA. The Submission can be viewed here: