The Banking Royal Commission’s Interim Report provided us with insights into two very different outcomes resulting from the activities of several financial services organisations. On one side we had the achievement of significant profits and, on the other, instances where adverse customer outcomes occurred as a result of products that were of little value to the consumer. Among its findings, the Commission determined that the way in which remuneration is structured within segments of the financial services industry drives a focus on profit even where that focus is at the expense of customers.
Although the Commission’s focus is financial services, the assertions made regarding remuneration and conflicts of interest is relevant for all industries. Do Boards have the right tools, processes and information to establish and maintain effective implementation of remuneration policies that align with stakeholder expectations and values together with shareholder returns across short- and long-term timeframes?
The use of malus clauses within remuneration are likely to have increased weight following the Commission’s finding. In effect, incentives will need to cover:
- The reward for exceeding an expected result;
- The penalty for either not achieving a result or delivering a bad result.
A lens not seen to have been widely applied is compliance with company policy and a published Code of Conduct. We believe the following questions pose a challenge for many Boards as they confront fundamental remuneration policy and practice:
- What is the organisation’s desired outcome?
- How is executive remuneration including incentives, aligned with outcomes?
- Are we rewarding the right outcomes?
- How do the desired outcomes align with employee / executive conduct?
- Are malus clauses present and are they effective in driving the desired outcome?
- Are audit controls and processes sufficient to identify policy breaches and adverse activity?
As Boards tackle areas of remuneration and relevance to outcome, the Commission provides context for the following questions:
- Should incentive plans exist? And if so, do the incentives reward the core accountabilities of a job or, where relevant, outcomes beyond plan/expectation (i.e. doing more than one’s basic job)?
- How should breaches of regulations or laws impact the remuneration models/outcomes? Where does accountability lie? Should breaches of this nature negate incentive eligibility?
- How should breaches of internal corporate policies or industry policies on best practice impact the remuneration model?
- Should organisations support partial achievement of outcomes as an eligibility factor?
- How important is “getting it right” all the time?
What the Commission’s Report showed was that adverse outcomes, no matter how small, have a significant impact on an organisation’s reputation. Already we are starting to observe financial services companies allocating significant funds (at least $1 billion remediation in the fees for no services scandal) to address and resolve issues raised by the Commission. Is the traditional risk / return trade-off for the investor still relevant? Have the risks increased?
The Commission’s findings highlight the need for Boards, not just in financial services, to increase their awareness of remuneration structures and levels well below the C-Suite and whether remuneration policies are promoting the right behaviours within organisations.
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