Base salaries for superannuation fund executives will likely increase from new regulation that will constrain short-term bonus payouts, according to Michael Moses, a principal in Mercer’s remuneration consulting practice.

Payouts will rise as the superannuation sector becomes more tightly regulated and more difficult to operate it, he said.

“The job of all executives, including the chief executive and chief in investment officer of a super fund, will become more demanding as a result of community expectations – a new stakeholder born out of the of the banking royal commission – and continuous media risk,” he added.

“These additional challenges will make these jobs harder – especially when compared to other sectors of the economy.”

Investment Magazine’s 2020 pay survey comes just as the prudential regulator introduces a suite of reforms across the financial services sector to ensure that staff do not profit from risky investments that were made in the short term to boost performance.

Among the regulator’s new reforms, variable remuneration will be deferred for between four and seven years.

“APRA’s proposed new pay standard could very well force funds to increase base salaries to compensate for these deferrals which in some cases could push top investment chiefs and super fund bosses into the listed sector where pay packages are significantly higher,” said Moses.

The draft standard (CPS 511) on pay reform is aimed at making sure executives retain more “skin in the game”.

Under CPS511, the heads of the big banks, funds and insurers will be forced to defer more than 60 per cent of their variable pay for seven years. Investment chiefs or highly-paid material risk-takers are also likely to be required to defer 40 per cent of variable pay.

Other proposed changes to the standard include a 50 per cent cap on the contribution of financial metrics to bonuses and four-year clawback periods. However, the regulator has stated 50 per cent cap on financial metrics might change.

Overlaying this proposed new rule is the Treasury’s Financial Accountability Regime (FAR), which has extended the recommendations made by the Banking Executive Accountability Regime (BEAR) to all APRA-regulated entities. Under FAR, executives will be required to defer 40 per cent of variable pay for four years.

Martin Fahy, the chief executive of the Association of Superannuation Funds Australia, said they were concerned about the possible “unintended consequences of FAR in that we could see innovation driven out as compensation costs are driven up.”

“It is important that APRA does not create onerous requirements for RSE licences that would detrimentally affect their ability to compete for talent both domestically and internationally,” he said, referring to the draft APRA standard.

Overall, Mercer’s Moses is positive about the shift away from a model which incentivises executives to make short-term decisions.

“Granting higher salaries, that may compensate for these deferrals, could be a better model for superannuation funds as executives who don’t do a good job of managing them will be terminated from the role instead of simply missing out on a bonus one year,” Moses said.

“This is a move in the right direction because executives will be accountable for making decisions that historically would bump up their bonus for one year but might be detrimental to the fund long term,” he said. “There are not a lot of other mechanisms that hold back some of the short-term payouts.”

Even if executives are measured on three to five-year performances but are still being paid each year, it is still a short-term bonus, according to Moses.

“Just because short-term incentives plays are deferred, does not make them long-term incentives,” he said. “We have experience where smaller banks implementing BEAR simply locked up the deferral as cash.”

Elizabeth Fry is the editor of Investment Magazine's digital platform. Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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