NAB moves to lift the game on executive pay

NAB is the first of the big four to change its pay system based on performance that weighs customer as well as financial outcomes.

National Australia Bank is the first of the big four to dump short-term and long-term incentives in favour of a single, variable reward based on performance against a range of measures that emphasise the customer as well as financial outcomes.

NAB chairman Ken Henry is right when he says the new framework reflects the direction and likely recommendations of the financial services royal commission. However, stakeholders have a right to be sceptical, given the industry’s poor record of late.

Too often in the past, when the balance has swung in favour of board discretion on pay outcomes, directors have not been up to the task. They’ve ducked the challenge and failed to enforce the agreed standards.

Executives have been handsomely rewarded when markets are flying and the economy is booming, but the required discipline from the board never materialises in the reverse scenario.

Henry pointed out yesterday that chief executive Andrew Thorburn’s pay would fall 11 per cent this year under the new framework, and that the total reward at target levels for the bank’s executive leadership team would fall 15 per cent compared to 2017.

It’s at this point, however, where the scepticism starts to appear. While there will be market support for NAB’s approach if the plan is well executed, many investors will prefer to wait and see the final outcome in the bank’s 2018 remuneration report.

In short, they will want confirmation that significant financial penalties have been applied to an executive team that’s hardly covered itself in glory.

For APRA boss Wayne Byres, who earlier this month complained about lax board oversight of remuneration practices, NAB’s announcement hasn’t come a moment too soon.

“Pleasingly, a number of entities have already told us about changes they are making in response to the issues we have raised,” Byres said.

Clearly, NAB won’t be the only bank to switch to a new framework.

Timely analysis

In an exhaustive analysis of the growing importance of ESG (environmental, social and governance) factors for the nation’s banks, Morgan Stanley has collated the amount of time each bank has spent in the witness box at the financial services royal commission.

The analysis, which includes the first five rounds of hearings but excludes the current insurance round, shows that Commonwealth Bank suffered the most scrutiny.

All-up, the major banks have been in royal commissioner Kenneth Hayne’s crosshairs for 126.8 hours, or 54 per cent of the 233.8 hours of public hearings.

Of that amount, CBA’s witnesses have been scrutinised for 41.2 hours, or 18 per cent of the time that the royal commission was sitting, followed by ANZ and National Australia Bank at 14 per cent. Westpac, at 9 per cent, has been the least scrutinised of the majors.

It’s no surprise that CBA dominated given the scale and frequency of its poor behaviour in recent years.

As the nation’s biggest home lender, it was a particular target in the consumer lending round (40 per cent), as well as loans to small businesses (23 per cent) due to the fallout from the $2.1 billion BankWest acquisition in 2008.

ANZ’s acquisition of Landmark saw it the main focus in lending to rural and regional communities (25 per cent), but the bank also took a hammering in consumer lending (22 per cent).

National Australia Bank’s fees-for-no-service scandal attracted a lot attention in the superannuation hearings (38 per cent), and it featured prominently, as well, in consumer lending (17 per cent).

Westpac, which has almost been missing in action, has been the big surprise.

Morgan Stanley analysts believe the investor focus on ESG issues will escalate, given recent developments in culture, conduct, compliance, remuneration, risk management and accountability. Lower profitability, it says, could be the price to pay for rebuilding community trust.

“We see an increasing probability that practices in relation to home loan repricing, and front book versus back-book discounting, may need to change, potentially reducing major-bank valuations by a further 5 per cent,” lead analyst Richard Wiles said.

Word on the street

There were eight signatures on the fateful letter to then-Treasurer Scott Morrison that called for the establishment of a financial services royal commission.

So persuasively did the chairs and chief executives of the four major banks argue for a royal commission in the November 30, 2017, letter that the Turnbull government immediately acquiesced. The rest is history, apart from one significant point.

The word on the street is that, of the four bank chairmen, it was National Australia Bank’s Ken Henry who was mostly responsible for developing the industry consensus that a royal commission was necessary to end political uncertainty and erosion of confidence in the financial system.

“We now ask you and your government to act to ensure a properly constituted inquiry into the financial services sector is established to put an end to the uncertainty and restore trust, respect and confidence,” the signatories said.

Asked by this column yesterday today if he had any regrets, Henry was unrepentant.

“I have no regrets if the industry has been embarrassed,” he said. “The industry should accept that there are good reasons for its embarrassment and it should respond accordingly.”

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