September 28, 2009.
AUSTRALIAN regulators have been at the forefront of a global push to rein in excessive risk-taking by banks, after the G20 agreed to a package of measures at the weekend.
At a meeting in the US city of Pittsburgh, the G20 leaders agreed to principles designed to encourage banks and other financial services companies to defer bonuses for key employees, as well as claw back pay if financial performance subsequently deteriorates.
Wayne Swan said work by the Australian Prudential Regulation Authority was at the core of recommendations from the Swiss-based Financial Stability Board, of which Australia is a member.
"Indeed, the work of APRA in Australia was the basis of the recommendations that have come from the (FSB)," the Treasurer told the Ten Network's Meet the Press program. "The essence here is to link executive pay in the financial sector to the long-term performance of the company.
"And of course, at the core of the global financial crisis has been the fact that obscene pay packages have been made to executives as their financial institutions were melting down."
The resilience of the nation's banking system, compared with the bailouts and nationalisations in other countries, has enhanced the global status of local regulators. The FSB's package, which comes ahead of Wednesday's draft findings by the Productivity Commission on executive pay, follows a second consultation report by APRA on performance based remuneration earlier this month.
APRA pushed strongly in the report for deferred pay to allow time for business outcomes to be reliably measured, as well as a clawback mechanism for boards to correct adverse pay outcomes in extreme circumstances.
Kevin Rudd asked APRA to work out the guidelines last year to curb what he referred to as "extreme capitalism".
On top of that, the federal government has put forward legislation to require shareholder approval for any executive payout worth more than a year's base salary.
Mr Swan yesterday accused the Opposition of frustrating the progress of that legislation.
The G20 said in a statement that it fully supported the FSB's implementation standards aimed at "aligning compensation with long-term value creation".
Under the principles, which now have to be adopted by each country, senior executives and employees who have a "material impact" on a firm's risk-taking will have a "substantial" part of their remuneration paid as a bonus, and linked to individual, business-unit and firm-wide performance. A proportion of that pay -- in the range of 40-60 per cent, and higher for the most senior management -- should be deferred for at least three years.
Furthermore, in excess of half of variable compensation should be awarded in shares, or instruments linked to shares. The remainder could be paid in cash, vesting gradually.
Bank of Italy governor Mario Draghi, who leads the FSB, said there had been cases where sizeable bonuses had been paid, "in spite of the horrible results. That's exactly what this system is meant to avoid now".
Bloomberg reported that several of the guidelines had already been implemented at firms such as Goldman Sachs, which set aside a record $US11.4billion ($13.1bn) to pay employees in the first half of this year.
Goldman has a set of compensation policies that include limiting bonus guarantees to one year, and paying a larger portion of the bigger bonuses in stock.
Morgan Stanley and Credit Suisse are among other firms that have created systems to claw back bonus payments.