Changes at the top
NAB shakes up executive pay in cultural revamp
NATIONAL Australia Bank has foreshadowed a revision of executive pay practices that will include incentives linked to treatment of customers as part of a sweeping cultural overhaul.
Chairman Ken Henry says the new policy, spurred by the banking royal commission, will be simpler to understand, reward long- term performance – including by deferring bonuses – and “incentivise the right behaviours, especially with respect to the treatment of customers”.
The new approach, which will apply from next year, comes as the bank aims to implement all the recommendations of the Sedgwick Review of bank pay by 2020.
Carried out by former senior public servant Stephen Sedgwick, the review was funded by banks and released last year.
NAB has already replaced product- based incentives for 700 retail branch managers, assistant branch managers, and sales team leaders in call centres with a group incentive based on a “balanced scorecard and NAB performance”.
“No retail branch manager or assistant branch manager has a product- based incentive,” Dr Henry said. “No call centre team leaders have product- based incentives.”
In a speech to the Australian Shareholders Association in Sydney yesterday, he said NAB was focusing on how pay drove behaviour in the bank.
The reforms were aimed at increasing transparency and rebuilding trust, with the banks copping a shellacking as their behaviour is examined by the royal commission.
“Given what has happened in recent years, it is clear that ‘ behaviours’ need to be considered alongside ‘ fi- nancial performance’,” Dr Henry said.
He suggested the issue could be dealt with by redefining the financial objective of a business, being “to maximise customer benefit and provide an attractive return on capital to shareholders”.
“A business with that dual objective would know its purpose beyond profit, it would earn the trust of the community and it would deliver strong performance over the longterm,” he said.
“The task has to be to design incentive schemes that reward a good customer experience and good shareholder returns.
“Even better, to have a deeply embedded culture of delivering both.”
He outlined a range of measures designed to improve the bank’s dealings with its customers, including requiring directors to be both shareholders and customers of the bank.
Other measures include holding board forums in regional centres such as Moree, Mildura, Toowoomba and Alice Springs where directors could hear direct feedback from customers, and encouraging board members to get out of the boardroom and explore the bank.
Leaders of big Australian business- es had never been under greater scrutiny because they had “in several respects, fallen short of community expectations”, Dr Henry told the crowd of retail investors.
Mr Henry said he had been closely following the royal commission as an open forum for customers, and it was already “catalysing action”.
“There is no doubt that, if customer interests had been better served, misconduct better addressed, and sooner, we would not be participating in a royal commission today,” he said.
But the misconduct was not just a consequence of employees being too focused on shareholder returns, he said. “Misconduct occurs when individuals serve themselves, when they find a loophole in the system, or they blatantly break the rules,” he said.
“Mostly, it has been to the ultimate detriment of the shareholder.”
Mr Henry drew comparisons with the business environment of the 1960s, when abundant natural resources and a strongly growing population led politicians into a “Lucky Country” trap of believing they did not have to do very much.
“When historians of finance look back on this period they will identify an unusual level of corporate complacency driven by relatively benign macroeconomic conditions and a long period of impressive ROE ( return on equity) performance,” Dr Henry said.
“Too many years of complacency failed to build any measure of trust in the world economy, especially in global capital markets.
“And when the protective barriers began falling in the 1980s, that absence of trust cost us dearly.
“It took an enormous policy reform effort over many, many years – in fact, I would say a whole generation of reform – to re- establish that trust.”