Recommendation 5.1 – Supervision of remuneration – principles, standards and guidance
In conducting prudential supervision of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should give effect to the principles, standards and guidance set out in the Financial Stability Board’s publications concerning sound compensation principles and practices.
Recommendations 5.2 and 5.3 explain and amplify aspects of this Recommendation
Recommendation 5.2 – Supervision of remuneration – aims
In conducting prudential supervision of the design and implementation of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should have, as one of its aims, the sound management by APRA‑regulated institutions of not only financial risk but also misconduct, compliance and other non‑financial risks.
Recommendation 5.3 – Revised prudential standards and guidance
In revising its prudential standards and guidance about the design and implementation of remuneration systems, APRA should:
- require APRA-regulated institutions to design their remuneration systems to encourage sound management of non-financial risks, and to reduce the risk of misconduct;
- require the board of an APRA-regulated institution (whether through its remuneration committee or otherwise) to make regular assessments of the effectiveness of the remuneration system in encouraging sound management of non-financial risks, and reducing the risk of misconduct;
- set limits on the use of financial metrics in connection with long-term variable remuneration;
- require APRA-regulated institutions to provide for the entity, in appropriate circumstances, to claw back remuneration that has vested; and
- encourage APRA-regulated institutions to improve the quality of information being provided to boards and their committees about risk management performance and remuneration decisions.
Recommendation 5.4 – Remuneration of front line staff
- All financial services entities should review at least once each year the design and implementation of their remuneration systems for front line staff to ensure that the design and implementation of those systems focus on not only what staff do, but also how they do it.
Recommendation 5.5 – The Sedgwick Review
- Banks should implement fully the recommendations of the Sedgwick Review.