APRA hints at executive remuneration approach

The Australian Prudential Regulation Authority (APRA) has given a hint of the approach it is taking regarding the Government’s request for an appropriate template for executive remuneration in the institutions it regulates, stating it has adopted a principles-based approach focused on structure and incentives.

The chairman of APRA, John Laker, told the Senate Standing Committee on Economics that the issue of executive remuneration was not entirely new to the regulator, which last year prepared a paper for a Reserve Bank conference in which it had referred to agency risk — the risk that the interests of management might not be aligned with the interests of shareholders and creditors.

He said the paper also referred to the manner in which executive remuneration arrangements could accentuate this risk in sustained, good economic times.

“Our view then, and now, is that executive remuneration that helps to deliver strong returns on capital over time, adjusted for the risks involved, or that rewards genuine outperformance of competitors, does not, of itself, raise prudential issues,” Laker said.

He said for a regulator, agency risk issues arose if remuneration arrangements encouraged management to focus on a shorter-term horizon than the long-term approach that would also be in depositors’, policyholders’ or fund members’ best interests.

Laker said incentives to generate short-term profitability or drive up the share price more rapidly could tempt management to pursue aggressive trading or growth strategies, or ‘hollow out’ the institution by paring back capital buffers or cutting costs, particularly in middle and back-offices, where risk management functions reside.