This week, APRA (Australian Prudential Regulation Authority) released its policy and supervision priorities for the calendar year which predominantly consists of items that were deferred from last year’s list at the onset of the pandemic. As APRA now turns its eye back to the development of prudential framework this year, on the agenda is the finalising and implementation of a revised standard on remuneration, a key Royal Commission recommendation that remains outstanding.
In late March 2020 when the first wave of COVID-19 hit Australia, APRA was only 7 weeks into its 2020 “to do” list. It made the snap decision to shift focus so that regulated entities could instead allocate their time and resources to implementing effective damage control strategies in response to the Coronavirus. APRA temporarily suspended public consultations and actions relating to certain aspects of the prudential framework, using the opportunity to instead monitor the impact of the rapidly evolving situation on entities’ financial and operational capacity. (Somewhat convenient, as strategic objectives detailed in APRA’s 2020-2024 Corporate Plan, includes the further enhancement of resilience and crisis readiness of Australia’s financial system. There’s no substitute for real-life experience, after all.)
In the background, APRA was engaged in addressing findings from the Financial Services Royal Commission including the recommendation for a revised remuneration standard. An initial consultation with regulated industries saw APRA pose prescriptive changes that included a minimum of 50% weighting on non-financial measures used in short term incentives. This was met with mixed reactions including many negative views from industry players and investors concerned with how prescriptive an incentive plan should be designed. In early November 2020, a revised draft of Prudential Standard CPS 511 Remuneration (revised CPS 511) was released for consultation, with more flexibility than the initial proposition including:
- replacing the 50 per cent cap on financial measures for variable remuneration with a requirement that material weight be assigned to non-financial measures, combined with a risk and conduct modifier that can potentially reduce variable remuneration to zero; and
- a reduction in the minimum deferral periods for variable remuneration from seven to six years for CEOs, from six to five years for senior managers and from six to four years for highly paid material risk takers.
The consultation period for revised CPS 511 will close on 12 February 2021. It is scheduled to be finalised in mid-2021 and come into effect for all regulated industries between 1 January 2023 and 1 January 2024.
What can we expect?
As APRA rolls out the revised standards in the coming months, first for Significant Financial Institutions (SFIs) with insurance and superannuation and non-SFIs following, we expect to see other sectors observe with interest. Given the continuing level of focus on executive pay generally for public companies, we are likely to see the influence of these revised standards weave their way through other industries in the next few years. The Reward Practice is currently meeting with boards and remuneration committees across industries to discuss impending legislative changes and broader trends in remuneration and reward structures in 2021.
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