8. Boards working hard on remuneration

Remuneration has always been a hot topic, but in recent years it’s come under intense scrutiny. 

Community concern over excessive executive pay has continued to grow, and shareholders and regulators are calling for reinforcement of accountability and more effective consequence management to be evident in remuneration outcomes for executives.  

And in recent times we have witnessed an increase in the number of ASX 300 companies receiving strikes against their remuneration reports.

The impact of APRA's draft prudential standard on remuneration 

Changes afoot

Against this backdrop, 73% of NEDs say their Board is changing or has made changes to its remuneration policy.

So, what are they doing differently? 

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Close to 60% are reviewing bonus and incentive schemes to ensure they are more effective. Around 40% are putting a greater weighting on non-financial metrics, including risk and customer. And almost one-third are introducing the ability to claw back incentives to apply consequence management over longer time frames.

Over half of the respondents reported more rigorous challenge from the remuneration committee on all substantive remuneration decisions while close to 40% were applying increased remuneration consequences for negative risk outcomes to either individuals or collectively. One third were introducing or enhancing formal annual tests of the effectiveness of remuneration policies in driving the desired behaviours and outcomes.

Stakeholder alignment challenges

Despite these positive potential changes, directors acknowledge that getting shareholders to support new remuneration arrangements can be a challenge, particularly given how hard it is to link remuneration outcomes to longer-term results:

APRA's draft prudential standard on remuneration 

Following the release of APRA’s draft prudential standard on remuneration in late July, PwC also asked ASX 300 Directors in a separate survey about its likely impacts. 

Of the 130 Directors that responded, 41% said it will result in more change than they were anticipating making around remuneration (35% slightly more and 6% significantly more) and 38% believe it will result in a substantial (an extra 5-10 hours) or major change (an additional 10+ hours) to their roles and workloads.

“While APRA’s draft prudential standard on remuneration directly impacts regulated entities, it will have a knock-on effect across industries as it starts to become the gold standard that all boards work towards."

Peter van Dongen

The APRA standards have more prescriptive requirements, including for financial metrics to be capped at a weighting of 50 per cent, and for more substantive deferrals to apply for longer periods which helps provide boards with the clarity they need to go forward with remuneration.

“However, its impact cannot be underestimated, and the challenge ahead for Directors is to work out how to execute on APRA’s full package of remuneration measures practically, without adding additional complexity to an already complex process.”

Peter van Dongen

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Peter van Dongen

Chairman, PwC Australia

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