Remuneration and risk under microscope

Government moves to stamp out risky investment behaviour will lead to greater scrutiny of remuneration in the financial services sector, particularly at the executive level, significantly impacting internal risk management and performance measurement.

“There definitely seems to be a move towards aligning remuneration with the risk horizon,” said David Abusah, principal, Mercer. “Obviously a lot of the talk is not just around the fix-based salaries. A lot of the talk is really more around variable pay components, and some of the current discussion there [is also] around variable pay and appetite for risk, and APRA [Australian Prudential Regulation Authority] regulations coming forward as well.”

Abusah said many are looking to ensure compensation plans are aligned with company strategy and encourage appropriate behaviour, which requires governance and oversight around remuneration.

Allens Arthur Robinson executive partner Paul Quinn agreed there would be increased scrutiny on salary packaging and how it ties in with risk management in organisations, with employers seeking legal advice on how to structure their remuneration packages, and short and long-term incentives, accordingly.

“It’s an issue that they’re very focused on at the moment, particularly remuneration committees. And the issue, of course, is to align remuneration models with driving the right behaviour for executives,” Quinn said.

However, he also expressed concern that the Government’s recent Budget changes to employee share schemes would impact an employer’s ability to incorporate risk elements into performance models, one of the most suitable ways to take account of risk.

Quinn said these tools are being curtailed before APRA and the Productivity Commission have released their recommendations, with the Government announcing not only taxation changes to the scheme, but also a cap on executive termination payments.

Lesley Maclou, partner and principal, Harmers Workplace Lawyers, agreed incentive arrangements can be used as a risk management tool, and said they should be linked to key and other personal performance indicators, as well as ensuring appropriate risk management is applied across the board.

For full coverage of the 2009 Salary Survey, see this week's Money Management.