The banking regulator has stepped up the pressure on banks by demanding senior executives feel a sting in their pay packets when scandals occur on their watch, saying lenders had "squandered" their reputations by focusing too much on profits.
The Australian Prudential Regulation Authority's (APRA) chairman, Wayne Byres, on Tuesday called for boards to put less emphasis on narrow financial goals when setting pay for top bankers.
Mr Byres told banks to lift their game on pay in a speech that argued banks had focused too much on profits, and failed to put enough emphasis on harder-to-measure non-financial risks.
The remarks come after banks' reputations have been battered by revelations of poor behaviour that have emerged at the royal commission into misconduct in financial services.
In a speech setting out ways for the industry to regain trust, Mr Byres made it clear he expected the banking industry to improve the level of accountability in remuneration - an area where APRA criticised the banks in a review published in April.
As he reiterated the findings of the review, Mr Byres toughened his language in a call for top executives to be more exposed to financial consequences when there were poor risk outcomes on their watch.
"As I have said previously, that is not to imply there should be a one-for-one adjustment. However, overall, senior executives seemed somewhat insulated from the consequences of poor risk outcomes. This must change," Mr Byres said at a risk management conference in Sydney.
Chief executives of the big four banks were paid between $2.8 million and $6.7 million in the latest year for which figures are available. That is less than the pay packets of several years ago, which frequently exceeded $10 million.
Commonwealth Bank cut more than $100 million from the remuneration of its most senior executives over the past two financial years following a string of scandals at the lending giant.
APRA also wants to see change in the "metrics" against which top bankers' bonuses are set. Mr Byres said there was too much emphasis on shareholders' financial interests, pointing to measures such as return on equity and total shareholder return.
"The current structure of long-term incentives in Australia is particularly problematic in this regard, and is out of step with how best practices in remuneration are evolving internationally. This will also have to change," he said.
Such changes have not always been backed by shareholders. When CBA attempted to link executive bonuses to performance hurdles relating to people and culture, investors rejected the plan amid concerns it would allow executive bonuses to continue to be paid at a time of falling returns.
Mr Byres also said stronger governance was needed on board remuneration committees, pointing to "insufficient challenge" by the committees and "insufficient documentation".
APRA has already said it will strengthen its prudential requirements on banker pay, but Mr Byres said boards and senior executives "shouldn't wait" to take action to improve remuneration practices. Some institutions had already told APRA they were making such changes, he said.
Mr Byres also highlighted the government's Banking Executive Accountability Regime, a package of measures that came into effect in July, including tougher powers for APRA; and the requirement for banks to develop "accountability maps" that set out what top executives were responsible for. Mr Byres said these changes might push the industry to hold itself to account "much more firmly and quickly than has been the case".
He also took aim at the banking industry's "risk culture", which he said had too often looked at issues through a "financial lens" without taking account of the impact on corporate reputations.
A key challenge facing risk managers was to put more emphasis on harder-to-measure non-financial risks, he said.
"The finance industry, and the risk profession that serves it, has a natural affinity for measuring things in dollars and cents, percentages and basis points," he said.
"But that means the conventional risk management frameworks and processes find it difficult to grapple with difficult-to-quantify risks, such as those relating to behaviour and reputation. If what gets measured gets managed, then I suspect that has played some role in bringing the industry to where it is today."This article was first published by https://www.smh.com.auAuthor: Clancy Yeates
Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.