CBA Board links remuneration to reputation

  • By Andrew Starke

The Commonwealth Bank has overhauled its executive remuneration framework in response to “the significant damage caused to the Group’s trust and reputation”, seemingly carried out even before the most recent civil penalty proceedings initiated by AUSTRAC.

CBA’s Annual Report, released on Monday morning, outlines how risk and reputation matters will have a greater role in the determination of CEO and group executive accountability and remuneration.

“The Rem report reflects a significant change to the remuneration framework which followed on from the first strike at last year’s AGM,” CBA Chair Catherine Livingstone said at a Monday media briefing.

“So you will see quite a different framework when you do have a chance to work through it, and that framework was finalised about a month ago. So hopefully you will see that it demonstrates much more transparency, much more accountability, and that is also reflected in the whole format of the annual report.”

Focus on risk

The Remuneration Report for the 2017 financial year includes a message from Remuneration Committee Chair Sir David Higgins in which he acknowledged the heightened focus on risk and reputation matters.

“Although the Group has delivered strong results for shareholders in FY17, the Board recognises the significant damage caused to the Group’s trust and reputation as a result of risk matters, most notably the recent civil penalty proceedings initiated by the Australian Transaction Reports and Analysis Centre (AUSTRAC) on 3 August 2017,” he wrote.

“In determining executive remuneration outcomes for FY17, the overriding consideration has been to the collective accountability of the executives for the overall reputation of the Group and risk matters.

“Accordingly, the Short-Term Variable Remuneration (STVR) outcomes for the CEO and Group Executives were adjusted downwards to zero for FY17. For the CEO this STVR reduction results in an FY17 remuneration outcome $2.73 million below what the Group’s FY17 performance would have otherwise delivered.”

The bank’s annual report revealed that Narev was paid $5.5m over the 2017 financial year. CBA had previously reported that his remuneration was $12.3m for the 2016 financial year but this was revised down to $8.8m as some long-term bonuses were clawed back.

“In assessing risk and reputation matters, the Board considered the timing of relevant matters to determine the appropriate element of remuneration to adjust, including deferred remuneration,” said Higgins.

“For a number of former group executives, deferred remuneration vesting outcomes were also significantly reduced including 100 per cent forfeiture of deferred STVR and Long-Term Variable Remuneration (LTVR) vesting reductions of approximately 40 per cent – 70 per cent.”

New approach

Higgins added that the Board had also recognised a shared accountability for the overall reputation of the Group and risk matters and therefore decided to reduce non-executive director base and committee fees for the 2018 financial year by an amount equivalent to 20 per cent of individual FY17 fees.

Subject to shareholder support, CBA will adopt a new executive remuneration approach including:

  • Increased weighting of financial measures in STVR and use of quantitative performance targets that are measurable and disclosed each year;
  • Non-financial measures in the LTVR relating to the areas of Trust and Reputation and Employee Engagement, which are strategic imperatives for the Group and strongly aligned to long-term value creation for our shareholders, limited to 25 per cent of the total LTVR;
  • Transparency of LTVR awards through the use of a face value methodology;
  • No duplication of performance measures across the STVR and LTVR plans; and
  • Enhanced consideration of risk in remuneration structures, with STVR deferral periods increased to two years and deferred into equity.

“(We are) very clearly saying the Board has discretion at all times and the reason for having deferred remuneration is so that the Board can exercise that discretion, which it does and will continue to do,” said Livingstone.

“And you will see in our new framework we have actually extended the period of deferral for short term incentives in particular, and that deferral is in the form of equity, no longer in the form of cash.

“So that will give the Board more ability to exercise that discretion to require forfeiture of deferred remuneration should that be appropriate.”