Westpac’s distorted incentives and excessive remuneration lead to bankers behaving badly

The banks are both too big to fail and too big to succeed, and those leading them are wrongly motivated.

Over the past six years, the 12 top executives at Westpac were paid $240m, or an average of $20m each, some of it in shares. CEO Brian Hartzer got $38m, which was 39 times the average Westpac salary.

Peak CEO salary was back in 2006, when David Morgan got $8.4m, 94 times the average Westpac employee. Across the big four that year, it was an average 96.2 times, according to Citi Research. In 2018, it was 34 times, which Citi is calling the nadir of CEO pay.

For most Westpac executives, the cash that drops into the bank account each month — that is, the base salary — is roughly equal to the average Australian annual wage. For the CEO it’s about 2.5 times that.

Westpac is not wildly out of line with the other banks, of course, or for that matter the rest of big corporate Australia.

READ MORE: Westpac CEO Hartzer survives emergency board meeting on Austrac | A trail of child exploitation

Being a bank or large company CEO or a direct report to the CEO has become one of the four ways to make more money than you can possibly spend and then die seriously rich, and it is the only one that is more or less risk-free.

The other ways involve taking risk — that is, property development, starting a company and being an investment manager, although to be fair, the last of those mostly involves other peoples’ risk.

The relevance of this to the latest Australian banking atrocity — Westpac’s 23 million alleged money-laundering transgressions — as well as all the other ones that went before, is that the banks are cash machines for executives, and the money blocks out rational thought.

They’re also cash machines for shareholders, of course: over the same six years, Westpac’s owners received $36bn in franked dividends, or about 80 per cent of profits.

Over the same period, the banks have been forced by the regulator to stop lending without the security of real estate. That has had two big effects: pushed real estate values higher as the banks competed with each to lend against a limited supply of it, and businesses and consumers have been starved of unsecured credit, so they have been forced to turn to other lenders unsupervised by APRA and charging much higher interest rates.

In other words, a colossal distortion has occurred in Australian commerce, and is still occurring. Overpaid executives are lending against real estate, and are focused on their salaries and bonuses, and who can blame them? Opportunities have to be grabbed, heights scaled and families provided for. You only get one chance at it.

But the consequence is loose governance and some misconduct, the evidence of which keeps piling up: the Future of Financial Advice reforms in 2013, the Sedgwick Review in 2017, the Prudential Review into CBA and the Hayne royal commission in 2018 all directly linked remuneration practices with serious misconduct affecting customers, and sloppy management.

In its statement of claim this week, Austrac complains of systemic failures in Westpac’s control environment, “indifference by senior management and inadequate oversight by the board”, with the gob-smacking result that the bank was shipping off cash for child exploitation.

Westpac CEO Brian Hartzer and chairman Lindsay Maxstead. Picture: AAP

Do CEO Brian Hartzer and chairman Lindsay Maxstead seriously think they can survive this with their reputations intact as well as their jobs? If they do, they are dreaming; it took 10 days after the Austrac action against CBA for Ian Narev to go as CEO; Hartzer will be lucky to last that long.

But will another banker elevated to CEO and paid $250,000 a month, cash, plus STIs and LTIs, be much different?

Even if the next one is a new broom sweeping clean etc, what about the one after that, or the one after that?

The banks are both too big to fail and too big to succeed, and those leading them are wrongly motivated.

As is made clear in the Austrac statement of claim, banks are effectively required to be regulators themselves these days — the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 says that, as part of its licence, a bank must constantly monitor who is using its services and to, in effect, “follow the money”, as Deep Throat urged.

This is no longer a matter for others to worry about, and Austrac’s actions against Commonwealth Bank and Westpac are designed to drive that point home.

But as gamekeepers, bankers make good poachers — the vampires are in charge of the blood bank.

It’s not that bank executives are money launderers and crooks themselves, but like their crooked customers they are trying to get rich.

Most will protest that they’re not in it for money, and that they just love the job, but they presumably negotiated hard on salary when they were hired or promoted — as a matter of principle, you understand, purely out of a desire not to seem like a push-over.

As outlined in this column two weeks ago, a couple of disillusioned NAB bankers, Joseph Healy and David Hornery, left to start a new bank — called Judo — with an entirely different incentive structure: instead of getting bonuses for personal performance, the only bonuses executives and staff get are in the form of equity, and granted for the total performance of the bank and not for individual results.

Joseph Healy also wrote a book about it, called Breaking the Banks.

I asked Joseph Healy, a former NAB direct report, whether the big four banks could abolish STIs (short-term incentive schemes) now and he was unequivocal: they could and should.

In a consultation paper released a few months ago, APRA proposed capping financial measures at 50 per cent of variable remuneration and to allow bonuses to be clawed back, which would be a start, but abolishing STIs entirely would be better. And reducing the monthly cash salaries of executives to, say, half the average annual wage wouldn’t hurt either.

The big banks have to improve their systems, fix their cultures and win back community trust at the same time as fighting a wave of digital disruption and low-cost competition.

Disruption is bad enough when you’re a trusted, well-oiled machine. For bumbling pariahs, it’s a world of pain.

Alan Kohler is editor in chief of InvestSMART.com.au