Bank bosses acting like pilots who have parachutes their passengers don't, regulator says

Ben Butler
Photograph: Mike Bowers/The Guardian

The pay packets earned by banking bosses mean they are like airline pilots who have parachutes when their passengers do not, the head of the prudential regulator says.

Speaking to a business lunch in Sydney on Wednesday, the chairman of the Australian Prudential Regulation Authority, Wayne Byres, said that his proposals to reform executive pay so that it was more in line with the interests of consumers “have undoubtedly caused a fair amount of angst”.

Apra wants boards to be more involved in setting pay and move away from relying on financial performance to set remuneration, and also wants companies to be able to claw back bonuses paid to executives when things go wrong further down the track.

The proposals reflect the recommendations of last year’s royal commission into the banking industry, which uncovered systemic poor treatment of customers that the inquiry head, Kenneth Hayne, said was often due to a culture of greed.

Related: Apra to be given new powers after scathing review of financial watchdog

Bank chief executive pay has reduced in recent years following a series of scandals that have wracked the sector and resulted in billions of dollars in remediation costs, but remains high compared to average wages.

For example, the boss of the Commonwealth Bank, Matt Comyn, received a package worth about $4.4m last year, even though he received only a partial bonus after the bank failed to meet performance targets.

Byres said that “the interests of pilots and their passengers are highly aligned: pilots want to take off and land safely just as much as their passengers”.

He gave as an example a recent flight from Sydney to Canberra for an “important commitment” that was cancelled because of high winds.

“As anxious as I was about missing my commitment, I was no more enthusiastic than the pilot about a risky take-off,” he said.

“The interests of financial firms and their customers are less well aligned. To stretch the analogy a bit further, the financial pilots often have parachutes when their passengers do not.”

This was often because the risks taken by bank executives may not crystallise for years, “well after those involved may have left the scene of an accident,” Byres said.

“We therefore cannot rely solely on the self-interest of financial pilots to deliver a financial system that is financially sound and producing fair outcomes to consumers,” he said.

Related: Apra’s bid to ban IOOF bosses from superannuation industry thrown out

He said Apra’s proposals were resisted by some large investors and their advisers who had been influential in designing the existing system.

“At least some boards have apparently been told that if they change their arrangements to comply with Apra’s requirements, they will be met with protest votes at AGMs,” he said.

“That is a strange and disappointing response to a board that would be seeking to comply with the law, but is illustrative of the passion that this topic has aroused.”

He said Apra’s proposal that there be a cap of 50% on the use of financial measures to determine pay “has been highly contentious”.

While industry concerns about the use of non-financial measurements were not “unreasonable”, they were not enough to dissuade Apra from pushing ahead, he said.

“It is accepted practice, for example, for the mining, industrial or aviation industries to use safety metrics within their remuneration frameworks – why should the finance sector not be able to produce something similar?”

However, he said the regulator was not locked in to the 50% limit.

“Whatever we do, however, the challenge is to find an alternative that gives sufficient comfort that a ‘profit alone’ approach will not re-emerge in another guise.”