AUSTRALIA: APRA bid to link risk and salaries

APRA bid to link risk and salaries

COMPANY boards of financial
institutions must take direct responsibility for the pay of sales
staff, traders, agents and risk personnel, as well as senior
executives, under new draft rules released by the prudential regulator.

Golden
parachutes will be frowned upon, as will company loans given to
executives to buy shares, in a bid by the Australian Prudential
Regulation Authority (APRA) to link remuneration with risk in banks and
other authorised deposit-taking institutions.

APRA's
discussion paper and draft guide on remuneration, released yesterday,
were described as "principles-based" by APRA executive member John
Trowbridge. APRA is calling for submissions on the proposals. Last
October, in the aftermath of the collapse of US giants Lehman Brothers
and Merrill Lynch, Prime Minister Kevin Rudd asked APRA to investigate
linking bank capital requirements — money they must set aside as a kind
of insurance to compensate for extra risk — with how they structured
salary packages. It was aimed at preventing "excessive risk-taking" by
staff chasing bonuses and other quick rewards.

Under
its plan, APRA will extend its formal governance standards to include
remuneration. APRA-regulated institutions must have a remuneration
policy and committee made up of non-executive directors, and boards
will be "held accountable" for compliance. APRA warned that its
"supervisory options" included the power to impose "additional capital
requirements" on institutions that did not comply.

It
names three groups whose actions could put the company at risk:
executives and directors, risk and financial control personnel, and
staff rewarded with a high proportion of performance-based pay, such as
financial market traders and commissioned sales staff and agents. It
warns that focusing overly on financial results such as revenue, sales
volumes or market share growth could promote risky behaviour, and that
poor performance in non-financial areas — such as staff management and
"adherence to corporate values" — could also pose a risk to the company.

It
also recommends boards consider deferring some performance-based
remuneration for "months or years", until the staff member's
performance can be properly understood.

But
PricewaterhouseCoopers partner Debra Eckersley said this conflicted
with the Government's planned changes to employee share schemes, under
which employees earning more than $60,000 a year would pay tax on
shares in the year in which they were bought — even if the shares were
subject to a vesting period.

Previously, tax could
be deferred until the employee gained formal and full control of the
shares. "Shares are the best way of deferring performance-based pay,"
Ms Eckersley said. "But following the budget, that really won't work —
people will have to pay tax on something they may or may not earn in
the future. There's a conflict between the budget

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