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What does the draft BEAR legislation mean for executive remuneration?

What does the BEAR Exposure Draft mean for exec rem?

Ben Travers and Stephen Walmsley outline the key executive remuneration implications of the draft Banking Executive Accountability Regime (BEAR) legislation.

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On 22 September 2017, the Federal Government released an Exposure Draft of its proposed Banking Executive Accountability Regime (BEAR) legislation. In respect of Executive Remuneration, what are the main changes Boards need to be aware of?

Remuneration Policy providing for reduction in Variable Remuneration

A key requirement of the Bill is that all authorised deposit-taking institutions (ADIs) must have a remuneration policy in place by 1 July 2018 that complies with the Bill’s requirements. The policy must include the ability for the variable remuneration (VR) of an “accountable person” to be reduced, if the ADI determines that the executive has not met his or her conduct-related obligations under BEAR. The reduction must be proportionate to the severity of the breach, and the ADI must also notify the Australian Prudential Regulatory Authority (APRA) that the reduction in VR has occurred.

Accountable persons include board members, persons with responsibility for management and control of the ADI, and persons with executive responsibility for nominated functions such as finance, risk, IT and HR.

Mandatory deferral of Variable Remuneration

Further, and generally, from 1 January 2019, when an ADI makes a decision on the award of VR to an accountable person, it must defer a portion of that VR for at least 4 years. However if the VR is awarded under a contract entered into before the BEAR legislation receives Royal Assent, and there is no change in that contract relating to VR before 2020, the new deferral requirement will only apply to VR awards occurring on or after 1 January 2020.

What is included in Variable Remuneration?

VR includes any amount which is conditional on the achievement of objectives, and any retention bonus (however described). Therefore we expect that it covers all short-term (including deferred) and long-term incentive awards, including awards contingent on continued service only. The government’s intention is that deferred remuneration should be valued at “face value” for the purpose of calculating the mandatory deferral amount.

Minimum deferral amounts

The amount of an accountable person’s VR which must be deferred for 4 years is set out below:

Size of ADI Amount to be deferred 
CEO of large ADI (resident assets of at least $100bn) Lesser of 60 percent of VR, or 40 percent of total remuneration (TR)
Accountable persons (other than above) of large / medium ADI  Lesser of 40 percent of VR, or 20 percent of TR
Accountable persons of small ADI (resident assets $10bn or less)  Lesser of 40 percent of VR or 10 percent of TR

We are engaging with Treasury with a view to obtaining further clarity on how the government intends these calculations to work. In any given year, executives are likely to receive VR derived from remuneration decisions made in the current and previous years, and it will be important for there to be clarity about what counts towards TR.

What do boards need to prioritise to comply with remuneration elements?

Key priorities for ADI board members include:

  1. Ensuring that the ADI’s remuneration policy is updated to meet the BEAR requirements by 1 July 2018;
  2. Considering the impact of BEAR on the ADI’s overall remuneration strategy and structure, in particular any VR that would typically be deferred for only one to two years; and
  3. Obtaining an assessment, based on executives’ current contractual status, of whether the BEAR deferral requirements will apply to them from January 2019 or January 2020.

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