Financial services salaries - not how much but why
Australia's financial services prudential regulator is not interested in how much the nation's top financial services executives are being paid but how and why they're receiving such large amounts.
That is the analysis of Australian Prudential Regulation Authority (APRA) general manager, David Lewis, who has told a forum that the regulator is "not interested in remuneration in and of itself".
"What we are concerned about is risk management," he said.
"So, when we see remuneration policies that encourage risky behaviour - yes - we get very interested."
Lewis said that despite all the public angst about the size of bank executive pay packets, "we're ambivalent about that".
"What APRA looks at is not the 'how much' of executive pay, but the 'why'.
"Our concern is to make sure that the remuneration practices adopted by regulated financial institutions are sound and do not imbed 'risk time bombs' in the balance sheet which could undermine the future viability of the firm," he said.
Lewis said that what APRA looked at were the performance hurdles that underpinned these pay structures.
"Are these performance hurdles consistent with the prudent risk management of the firm? Or do the performance indicators used to reward executives promote short-term profits at the expense of the firm's long-term sustainability?
"Is too much emphasis being placed on revenue growth today and insufficient regard being paid to the quality of assets being brought onto the firm's balance sheet?"
Lewis said that overall Australian financial institutions had measured up well to APRA's scrutiny, especially when compared to their overseas counterparts.
However he said that there were some concerns around performance measurements relying too heavily on generic measures such as share price, market share or earnings per share.
"Metrics such as these are too high level to provide a reliable measure of individual performance and risk-taking," Lewis said.
He said better practice was to adopt a balanced scorecard approach incorporating a mix of individual performance metrics and qualitative assessment.
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