It shouldn’t come as a surprise to anyone that the Australian Prudential Regulation Authority (better known as APRA) has drastically watered down its executive pay guidelines applying to the financial sector. Back in May, APRA released a set of draft principles on remuneration which were supposed to cover deposit taking institutions and insurance companies.
The rules were a knee-jerk reaction by the Rudd Government to the problem of “extreme capitalism”, specifically, the scenario bankers being paid huge short-term cash bonuses to take excessive risks. Should those risks prove fatal, the responsibility would almost certainly lie with the government (read: they taxpayer) to bail out the financial institution. When this realisation came to light, the Federal Government, in a desperate bid to be seen to be doing something about executive pay, set APRA to work on a set of principles. At the time Crikey noted that the move was a cynical political ploy. Months later and those views have proven eerily accurate.
In May, when the draft guidelines were released, Crikey noted that while there were strong elements to the rules, it was noted that “the [draft] Standards do not constitute black letter rules, but rather a set of fairly vague guidelines which remuneration consultants and lawyers will be able to easily circumvent.” Moreover, the draft guidelines did not address the real problem of financial industry salaries — their quantum. Rather, they focused purely on linking remuneration and risk taking but did not actually specify levels of fixed salary or discretionary ‘short term’ bonuses paid to senior executives.
APRA’s draft principles did make a few handy suggestions — most notably, that executive directors should not be permitted to sit on companies’ Remuneration Committees. This was the case with Babcock & Brown’s Phil Green, who sat on the Remuneration Committee which paid him more than $30 million in cash in the years immediately before Babcock collapsed. Green’s bonuses were based on the very risk taking behaviour that APRA was seeking to prevent.
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Sadly for shareholders, on Monday APRA revealed that the few valuable elements to its otherwise useless principles were being revised. After receiving 51 submissions from banks and other financial institutions, the spineless prudential regulator has withdrawn its most useful proposal (banning executives from sitting on remuneration committees) and reverted back to the requirements that remuneration committees merely consist of a majority of independent directors and an independent Chairperson. APRA also weakened its stance on the use of remuneration consultants, dubbed Ratchet, Ratchet & Bingo by Warren Buffett, for their tendency to have a somewhat inflationary effect on executive pay.
Meanwhile, APRA announced that implementation of its meaningless proposals won’t be occurring until April 2010 at the earliest, presumably to give banks more time to make submissions to further water-down the already diluted principles. APRA also read from the executive playbook in noting that it “agrees that risk in remuneration practices is one risk among many facing regulated institutions, and its proposals are not intended to give undue prominence to this risk.”
Financial executives can once again rest easy — APRA’s policies are little more than a political smokescreen to provide an excuse next time a taxpayer bailout is needed. The entire exercise has been an utter waste of time.