bendigo and adelaide bank limited date - royal commission · 2019. 10. 18. · bab.9000.0003.0002 2...

BAB.9000.0003.0001

ROYAL COMMISSION INTO MISCONDUCT IN THE BANKING, SUPERANNUATION AND FINANCIAL SERVICES INDUSTRY

WITNESS STATEMENT OF ROBERT NIVEN JOHANSON

RUBRIC 7-05

Bendigo and Adelaide Bank Limited

Statement of:

Address:

Occupation:

Date:

Robert Niven Johanson

The Bendigo Centre, 22-42 Bath Lane, Bendigo,

Victoria

Chairman, Bendigo and Adelaide Bank Limited

7 November 2018

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I, Robert Niven Johanson, of The Bendigo Centre, 22-42 Bath Lane, Bendigo, Victoria, state:

Introduction

I have prepared this witness statement in response to questions directed to Bendigo and

Adelaide Bank Limited (the Bank) under Rubric 7-05 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Rubric).

2 I hold the position of Chairman of the Bank. I have been a non-executive director of the Bank since 1988, and was appointed Chairman in 2006.

3 I make this statement from my own knowledge, my review of Bank documents, and proper

enquiries I have made of officers and employees of the Bank. I have been assisted in confirming specific details by officers and employees of the Bank providing me with an understanding of

relevant matters where required.

Definition of " Relevant Senior Executives"

4 The questions in the Rubric concern the Bank's "Relevant Senior Executives·. "Relevant Senior

Executive" is defined as any person who would be an "accountable person• of the Bank by reason of having a responsibility of the kind set out in sub-sections (3)(a)-(e) and (g)-(i) of section

37BA of the Banking Act 1959 (Cth); or persons with "direct responsibility" for the Bank's

consumer lending, business lending, wealth, superannuation and insurance activities.

5 For the purposes of this statement, I have determined that the positions at the Bank which meet

this definition comprise:

(a) the Bank's non-executive directors;

(b) certain members of the Bank's executive committee, being the Managing Director, the Chief Financial Officer, the Chief Risk Officer, and the Chief People Officer (Relevant Executive Committee Members); and

(c) the heads of the Bank's Group Assurance, Consumer Banking, Business Banking, Wealth (which includes superannuation) and Insurance divisions (Other Relevant Senior Executives),

(together, the Relevant Senior Executives).

6 On the Bank's current appointments, the Relevant Senior Executives are as follows:

Non-executive directors Name

Chairman Robert Johanson

Non-Executive Director Jan Harris

Non-Executive Director Jim Hazel

Non-Executive Director Jacqueline Hey

Non-Executive Director Robert Hubbard

Non-Executive Director David Matthews

Non-Executive Director Tony Robinson

Non-Executive Director Vicki Carter REDACTED lrrele Jani and ConMent1al

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Relevant Executive Committee Members Name

Managing Director Marnie Baker

Chief Financial Officer Travis Crouch

Chief Risk Officer Taso Corolis

Chief People Officer Louise Tebbutt

Other Relevant Senior Executives Position

Head of Group Assurance Melissa Grantham

Head of Consumer Banking Nick Carter

Head of Business Banking Andrew Smith

Head of Wealth Paul Rohan

Head of Insurance Andrew Robertson

Question 1

Explain how each Relevant Senior Executive is currently remunerated. Exhibit:

(a) any current policies, plans, manuals, guidelines or other documents governing the remuneration

and incentives of the Relevant Senior Executives; and

(b) the current scorecard or other key performance indicators applicable to each Relevant Senior Executive.

Remuneration and incentives

Non-executive directors

7 The Bank's non-executive directors are paid a fixed fee, consistent with industry practice. The

Chairman receives a higher fixed fee, in recognition of the additional time commitment and

responsibil ities involved in that position. Some non-executive directors are paid additional fees relating to appointments to subsidiary boards and the Community Bank National Council. The

design of non-executive director remuneration is discussed in further detail at paragraphs 43 to 48 below, and the remuneration of the Bank's non-executive directors for the current and

previous three financial years is set out at paragraphs 70 to 73 below.

8 The Bank's current policy governing the remuneration of its non-executive directors is described

in section 5 of the Bank's Board Policy (BAB.5039.0002.0066). Now produced and shown to me and marked RNJ·1 is a copy of that policy.

9 Further information regarding the remuneration of non-executive directors is included in the Bank's Remuneration Report for the year ended 30 June 2018, being an extract of the Bank's

Annual Financial Report (BAB.5039.0002.0038) (Remuneration Report). Now produced and shown to me and marked RNJ-2 is a copy of that report.

Relevant Executive Committee Members

10 T he Bank's current policy governing the remuneration and incentives of the Relevant Executive

Com · ee Members is the Bank's Remuneration Policy (BAB.5038.0001.0053 , a roved b the

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Board on 31 July 2018. Now produced and shown to me and marked RNJ-3 is a copy of that

policy.

11 Further Information regarding the remuneration of the Relevant Executive Committee Members Is included in the Remuneration Report exhibited at paragraph 9 above (BAB.5038.0002.0038).

12 There is a range of other documents containing information regarding the Bank's incentive measures relating to the Relevant Executive Committee Members. Now produced and shown to me and marked RNJ-4 is a bundle of these documents, comprising:

(a) the Bank's Short Term Incentive Plan invitation template for the 2018 financial year (BAB.5038.0001 .0138);

(b) the Bank's Long Term Incentive Scheme FAQs (BAB.5038.0001 .0093);

(c) the Managing Director performance rights invitation template (BAB.5038.0001.0109);

(d) the performance rights invitation template for eligible employees other than the Managing

Director (BAB.5038.0001 .0095); and

(e) the Bank's Employee Salary Sacrifi ce, Deferred Share and Performance Share Plan (BAB.5038.0001.0033).

13 As set out in the Remuneration Policy, the Relevant Executive Committee Members are

remunerated by a mix of three components, as follows:

(a) base remuneration, which comprises two sub-components:

(i) fixed base (cash), in an amount that recognises the individual's capability and experience; and

(i i) deferred base (deferred shares), which are grants of shares which are held on

trust for a deferral period, in order to build personal exposure to the Bank's share price over that period;

(b) a short term incentive component available to be awarded when the Bank's annual financial performance exceeds expectations; and

(c) a long term incentive component, to drive and reward long term growth and sustained company value, and to al ign the interests of participants with shareholders and other

stakeholders.

These arrangements are elaborated in the table below.

Base remuneration

Fixed Base - Cash

Comprise base salary and superannuation contributions.

Together with deferred base, is set by reference to the size and complexity of role and individual responsibilities.

Amount is determined in the context of the external

Signature ( ..

Deferred Base - Equity

Annual grants of deferred shares.

Deferred shares (fully paid ordinary shares) issued at no cost and beneficially owned by the executives from grant date.

Executives do not receive cash if they decide not to accept the grant offer,

Variable remuneration

Short term Incentive

The maximum short term incentive opportunity is set for individual executives at the start of the year.

The maximum short term incentive opportunity is a fixed dollar amount.

Short term incentive awards are capped at

Long term Incentive

Annual grants of performance rights. Each right equates to one ordinary share in the Bank calculated at face value.

Rights are granted at no cost and have no exercise price.

Vesting is subject to customer advocacy and total shareholder return

RECACTE-0 --• - --

Witness lrrele• ant and :::onf1jential

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comparable roles in the unless the Board decides 100% of target with no performance measures, and banking sector and otherwise. opportunity°to increase service conditions. companies of a similar

Grants are subject to the payments for

Performance measures are size and complexity, and

continued employment 'above target'

tested over four years for the performance outlook.

("service condition") over performance.

Managing Director and three Recognises an the deferral period. Awards are subject to years for other Executives. individual's experience,

Subject to risk Group and individual

Vesting is also subject to skills, competencies and

adjustment at Board performance and

continued employment and value.

discretion (discussed at passing risk,

risk adjustment (discussed paragraph 40 below).

compliance and values at paragraph 40 below).

gateways. Shares are held on trust

Awards, if paid, are in for the deferral period.

cash or a combination of cash and deferred equity.

If the award exceeds $100,000, one third of the whole amount is deferred into equity (deferred shares), issued on substantially the same terms as deferred base remuneration.

14 The table below sets out the target remuneration mix, split between cash and equity, for each Relevant Executive Committee Member for the 2018 financial year. The actual remuneration mix will vary depending on performance outcomes. The percentages represent the maximum opportunity for each component, rather than what is actually received.

Position Fixed Deferred Cash Deferred LTI Awarded Awarded base Base STI STI as Cash as

Equity

Managing Director 40% 25% 7% 3% 25% 47% 53%

Chief Financial Officer 50% 10% 12% 8% 20% 62% 38%

Chief Risk Officer 60% 10% 7% 3% 20% 67% 33%

15 The role of Chief People Officer is new to the Bank, and accordingly no remuneration mix is available for the 2018 financial year. The remuneration mix for the Chief People Officer for the 2019 financial year is as follows.

Position

Chief People Officer

Signature

Fixed base

60%

Deferred Cash Deferred L Tl Awarded Awarded Base STI STI as Cash as

Equity

10% 10% 5% 15% 70% 30%

Witness

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16 At the start of each financial year, the Bank's Board sets the remuneration plans for the Relevant

Executive Committee Members, with the assistance of the Board's Governance & HR Committee, which, among other things, operates as the Bank's remuneration committee.

17 The total target reward for each Relevant Executive Committee Member is proposed by the Governance & HR Committee, and then reviewed by the Board to ensure the mix and total target

reward continues to be fair and balances the interests of stakeholders.

18 Since 2oog, the Managing Director's remuneration mix has included a sizeable deferred equity

component (as set out in the table at paragraph 14 above). The mix also includes a relatively

small proportion of variable remuneration linked to annual performance and a larger proportion linked to longer term performance and shareholder outcomes. This structure recognises the

unique role of the Managing Director in driving the strategic direction and delivering longer-term and sustainable improvement in shareholder value.

19 The Chief Financial Officer's remuneration mix includes fixed base and variable remuneration

linked to risk outcomes. The mix represents a moderate, but still meaningful, percentage of equity-based remuneration linked to shareholder interests. The maximum short term incentive

plan opportunity is limited to 20 percent of the total mix.

20 The mix for the Chief Risk Officer includes a larger fixed base and lower short term incentive plan component. This recognises the independence and critical nature of this role, which is weighted

towards management of risk outcomes rather than performance. In addition. the performance criteria set out in the Chief Risk Officer's short term incentive plan focus on risk measures rather

than business performance.

Other Relevant Senior Executives

21 The Other Relevant Senior Executives are remunerated by:

(a) base pay;

(b) a short term incentive component, known as the Value Created Dividend (VCD) Plan

(which applies to all salaried employees, other than members of the Executive Committee); and

(c) in certain cases, a long term incentive component.

22 As with the Relevant Executive Committee Members, the remuneration of the Other Relevant

Senior Executives is governed by the Remuneration Policy exhibited at paragraph 10 above (BAB.5038.0001.0053). Further details of their remuneration mix are included in the tables

provided in response to Question 5 of the Rubric (see paragraphs 70 to 73 below).

23 Information regarding the VCD Plan is contained in the Bank's Value Created Dividend Plan Guide (BAB.5038.0001.0140). Now produced and shown to me and marked RNJ-5 is a copy of

that guide.

Performance Assessment and Scorecards


24 The Board reviews its performance, and the performance of individual non-executive directors,

every year. From time to time, this process is led by an external consultant. In those years when

a consultant is not engaged, the Chair leads the assessment of the Board and each director, with a non-executive director nominated by the Board leading the assessment of the Chair.

25 Now produced and shown to me and marked RNJ-6 is a copy of the Board's goals and objectives

for the 2019 financial year (BAB.5039.0002.0065). REDACffD Irrelevant and Confidenhal

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26 Now produced and shown to me and marked RNJ-7 is a bundle of documents which contain the

most recent version of the scorecard applicable to the Relevant Executive Committee Members

being scorecards for the 2018 financial year. For ease of reference, these documents are set out

in the table below. I note that Louise Tebbutt commenced as Chief People Officer on 10 October

2018, and Chief People Officer is a new role at the Bank. As a result, no scorecard has yet been

created for Ms Tebbutt.

27 Travis Crouch was appointed as the Bank's Chief Financial Officer in August 2018, and a

scorecard for Mr Crouch has not yet been created. I have therefore included the scorecard for the

previous Chief Financial Officer. Richard Fennell.

Position Name Scorecar<l I Performance indicators

Managing Director Marnie Baker BAB.5038.0001.0019

Chief Financial Officer Richard Fennell BAB.5039.0001.0084

Chief Risk Officer Taso Corolis BAB.5038.0001.0124

Chief People Officer Louise Tebbull New role - scorecard not yet created


28 Now produced and shown to me and marked RNJ-8 is a bundle of documents which contain the

most recent version of the scorecard applicable to the Other Relevant Senior Executives. For

ease of reference, these documents are set out in the table below.

Position Name Scorecard I Performance indicators

Head of Group Assurance Melissa Grantham BAB.5039.0002.0062

Head of Consumer Banking Nick Carter BAB.5039.0002.0061

Head of Business Banking Andrew Smith BAB.5038.0001.0142

Head of wealth Paul Rohan BAB.5038.0001.0144

Head of Insurance Andrew Robertson BAB.5038.0001.0086

Question 2

Explain how the current system of remuneration and incentives for the Relevant Senior Executives was

designed. In doing so:

(a) identify any underlying principles, philosophy or theoretical approach applied by BAB in designing

the system of remuneration and incentives;

(b) describe the particular attitudes or behaviours that the system of remuneration and incentives

was designed to encourage, and the attitudes or behaviours that it was designed to discourage;

(c) explain how the system operates to encourage or discourage the attitudes or behaviours identified in paragraph (b) above;

Rd)ACTEC Ir elevant and Ccnf1de11lal

Signature Witness

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Exhibit relevant documents.

Where the answer to this question differs between different roles, please answer the question for each of the different roles.

Purpose and guiding principles

29 The purpose and the guiding principles of the Bank's remuneration framework are recorded in the overview at page 2 of the Bank's Remuneration Policy exhibited at paragraph 10 above (BAB.5038.0001.0053). As stated in the policy, the Bank's guiding principles for its remuneration framework are:

(a) simplicity;

(b) transparency and procedural fairness;

(c) alignment with the Bank's values;

(d) appropriate risk behaviour; and

(e) supporting good customer outcomes.

30 The Board has a long-held view that remuneration which is leveraged towards short-term performance can create a disconnect between the individual's interests and the long-term interests of shareholders and other stakeholders, especially customers, including increasing the risk of poor culture within an organisation.

31 Based on this view, the Bank has historically limited the proportion of incentive-based pay, particularly staff bonuses, to levels that are relatively low compared to the Bank's peers, thereby weighting remuneration towards base pay. Now produced and shown to me and marked RNJ-9 is a paper submitted to the Governance & HR Committee on 23 July 2018 (BAB.5037 .0001.1882),

which includes an example analysis of the Bank's executive remuneration arrangements compared with the wider industry.

Base pay

32 The Bank's weighting of remuneration towards base pay is designed to recognise each individual's capability and experience, as well as their sustained contribution to the business.

33 The Relevant Executive Committee Members' base remuneration includes a significant component of deferred shares, which are grants of fully paid ordinary shares held on trust for a minimum deferral period (typically two years) with vesting subject to risk adjustments at the Board's discretion (discussed at paragraph 40 below). This deferred shares component is designed to build executives' personal exposure to the Bank's share price performance over a minimum period of two years, with an exposure to risk adjustments.

Short term incentives

34 The Bank has a short term incentive plan with a single bonus pool shared by all salaried employees, including the Relevant Executive Committee Members and Other Relevant Senior Executives.

35 Separate "invitations" to participate in the short term incentive plan are used for different categories of employees, as follows:

(a) a Short Term Incentive Plan invitation, which is offered to members of the Bank's Executive Committee and certain others; and

(b)

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36 The short term incentive plan is described in section 4 of the Bank's Remuneration Policy exhibited at paragraph 10 above (BAB.5038.0001.0053). At the beginning of the financial year, the Board sets parameters for the creation of a bonus pool. If these parameters are satisfied, and

the Bank's financial performance is above a threshold level of financial performance based on the year's budgeted profit, the Board creates a bonus pool at its discretion, from which, for all employees, payments under the plan may be made. A defining feature of the Bank's short term incentive plan is that the bonus pool is a product of the collective performance of the organisation, rather than associated with individual performance. It is also only awarded when the Bank's performance exceeds, rather than simply meets, expectations; it is not a payment to people for doing their job, which the Bank considers is properly the role of base remuneration. In the very limited circumstances where an award exceeds $100,000, one third of the whole amount is deferred into equity, issued as deferred shares on substantially the same terms as deferred base remuneration (i.e. held on trust for a period of two years).

37 Now produced and shown to me and marked RNJ-1 O is a copy of a paper put to the Governance & HR Committee on 23 July 2018 (BAB.5037.0001.1813) regarding the bonus pool for the financial year 2018, which provides an example of the process by which the pool is created.

Long term incentives

38 The Bank's long term incentive plan is offered to members of the Bank's Executive Committee and some other individuals at the absolute discretion of the Board. It is designed to drive and reward long term growth and sustained company value, and to align the interests of participants with shareholders and other key stakeholders.

39 The long term incentive plan applies to a very limited number of the Bank's employees. Under the long term incentive plan, the Bank grants "performance rights" to employees, representing a right to shares for nil consideration in the Bank if performance conditions have been met over the course of a three, or in the case of the Managing Director four, year period. The performance conditions are based on total shareholder return and the "net promoter score'', a global industry standard used to measure customer advocacy.

Risk adjustments and reclaiming of incentives

40 As set out in section 7.1 of the Remuneration Policy, the Board has the discretion to adjust the deferred share component of base remuneration and variable remuneration (including short and long term incentive plan payments) to take account of "risk" factors including:

(a) the outcomes of business activities;

(b) the risks related to the business activities, taking into account, where relevant, the cost of the associated capital;

(c) the time necessary for the outcomes of those business activities to be reliably measured; and

(d) any unforeseen or unexpected circumstances or consequences and risk.

41 Section 4.6(c) of the Remuneration Policy allows the Board to reclaim short term incentive plan deferred shares that have not vested in circumstances where an employee's employment with the Group ends, the employee acts fraudulently or dishonestly, or otherwise at the Board's absolute discretion.

42 Section 7 of the Remuneration Policy also allows the Board to claw back the deferred component or the awarded component of short or long term incentives, or otherwise adjust variable remuneration to take account of the risk factors identified at para ra h 40 above.

Witness

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43 The foregoing relates to employees of the Bank. Non-executive directors are the subject of separate arrangements, as discussed in the following paragraphs.

44 The Bank, through its Board, seeks to achieve a composition of directors with the necessary skills, knowledge and experience to enable the Board to provide the oversight needed to develop and achieve the Bank's strategy.

45 The Bank's non-executive directors are paid a fixed fee. Accordingly, there is no direct link between non-executive director fees and the annual results of the Bank. Non-executive directors do not receive bonuses or incentive payments, or equity-based pay.

46 Shareholders approved an aggregate fee pool for non-executive directors of $2,500,000 at the 2011 Annual General Meeting, which has not changed since. This fee pool covers payments (including superannuation) for the Board and payments to the Bank's non-executive directors appointed to subsidiary boards and the Community Bank National Council.

47 The Board makes allocations from this aggregate fee pool for non-executive directors. The fees are reviewed annually by the Governance & HR Committee, which takes into account a number of considerations, including:

(a) the scope of responsibilities of non-executive directors and time commitments; and

(b) fees paid by peer companies and companies of similar market capitalisation and complexity, including survey data and peer analysis to understand the level of director fees paid in the market, particularly in the banking and finance sector.

48 The fixed annual fee paid to non-executive directors is inclusive of superannuation contributions at 9.5 percent, and non-executive directors can elect to receive as cash the amount of superannuation that is above the maximum contributions limit.

Witness

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(d) explain the steps that BAB takes to assess whether the system is effective in encouraging or discouraging the attitudes or behaviours identified in paragraph (b) above; and

(e) discuss the results of any steps taken to assess the effectiveness of BAB's system of remuneration and incentives.

Exhibit relevant documents.

Where the answer to this question differs between different roles, please answer the question for each of the different roles.

49 The Board assesses the Bank's remuneration arrangements as part of its annual remuneration

review, when approving new or renewed appointments, and when engaging with industry and government (for example, in response to the Sedgwick Review).

50 In doing so, the Board is always seeking to improve the Bank's remuneration policies and

practices to encourage appropriate behaviours. As stated above, the Board has long considered

that remuneration which is leveraged towards short-term performance can create a disconnect between employees, shareholders, and customers, and increase the risk of poor culture, and

therefore avoids using it to any substantial degree.

51 As a result of these ongoing assessments, the Board regularly introduces changes and refinements to the design of the Bank's remuneration system. Some changes have included :

(a) the introduction of deferred base pay for the Managing Director (from the 2010 financial

year) and for other Relevant Executive Committee Members (from the 2013 financial

year); and

(b) the inclusion of a 'Customer Hurde' performance measure in the long term incentive plan (from the 2017 financial year).

52 Remuneration arrangements implemented by the Board are, of course, subject to review by the

Bank's shareholders as part of a vote on the Bank's annual remuneration report. In addition, shareholders vote specifically on equity grants to the Managing Director. In this regard,

institutional shareholders are more likely to vote on shareholder resolutions and typically require executive remuneration to have a substantial weighting towards incentive based pay that is

directly exposed to financial performance and share price performance. The "75% approval"

requirement for remuneration arrangements can trigger serious governance implications, including a board spill resolution in the event of "two strikes". As such, the Board must remain

within the range of remuneration settings regarded as appropriate and desirable by a significant majority of its shareholders, particularly institutional shareholders.

Question3

Summarise any material changes to the system of remuneration and incentives for the Relevant Senior Executives that have been made since the Sedgwick Review and explain why they were introduced. Exhibit relevant documents. including relevant board papers and minutes.

53 With the exception of Recommendation 13, the Sedgwick Review focused predominantly on the

remuneration arrangements and variable reward payments for retail, customer-facing staff and third party brokers, rather than the remuneration of senior executives.

54

Signature Witness

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Consistent with the objectives of the recommendations for Frontline staff, the variable reward payment and performance management arrangements of all senior and (retail

bank) middle level executives be based on:

a. Their overall performance against a number of measures that reflect the nature and breadth of their role; with

b. Customer oriented. ethical behaviour and non-financial measures accounting for the dominant factors in that assessment.

55 The Bank considered, and continues to consider, that its system of remuneration and incentives for the Relevant Senior Executives is substantially compliant with this recommendation.

56 The Bank had implemented many remuneration practices consistent with the Sedgwick recommendations well before the commissioning of the Sedgwick Review. For example:

(a) more than 10 years ago, the Bank removed incentives that were directly linked to products and the achievement of sales targets; and

(b) the Bank had established a modest bonus scheme where payments make up a relatively small proportion of total individual employee pay. Satisfactory assessment of valuesbased behaviour (including risk and compliance) has long been a gateway to eligibility for any bonus payments. Now produced and shown to me and marked RNJ-11 (BAB.5038.0001.0092) is a copy of the Bank's 'Assessing Gateways Help Card', which demonstrates this aspect of employee assessment.

57 The remuneration of senior executives is also assessed against a range of measures that reflect a high level of alignment with the Sedgwick recommendations. As seen in the scorecards provided in response to Question 1 above, while the financial performance of the Bank and positive outcomes for shareholders remain a key consideration for senior executives, customer oriented, ethical behaviour and non-financial measures play a determinative role in their performance assessments.

58 Notwithstanding this high level of alignment with the Sedgwick Review, the Bank has reviewed its operations against each of the Review's recommendations, with the aim of improving its systems further. Now produced and shown to me and marked RNJ-12 is an example of one of the Bank's working documents which outlines the agreed actions and status of implementation against each recommendation (BAB.5000.0003.0752).

5g The Bank expects that the remaining work identified in that paper will be completed well in advance of the 2020 industry deadline.

Question 4

Summarise any material changes to the system of remuneration and incentives for the Relevant Senior

Executives that BAB plans to implement in the foreseeable future. Explain when and why BAB plans to implement those changes. Exhibit relevant documents, including relevant board papers and minutes.

APRA review of executive remuneration practices

60 In April 2018, the Australian Prudential Regulation Authority (APRA) released its Information Paper on remuneration practices at large financial institutions. Supplementary guidance papers are still to follow, but in the meantime, the Bank has reviewed its remuneration framework to identify any changes needed to align with APRA's recommendations in the Information Paper.

61 The review has confirmed that the Bank's remuneration framework meets a number of the

Witness

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(a) past practice has shown that individual short term incentive awards have been adjusted to reflect divisional and individual performance, along with risk outcomes;

(b) the maximum short term incentive opportunity for the Chief Risk Officer is modest when compared to industry practice. Also, the Chief Risk Officer's short term incentive component stands at 10 percent of total remuneration;

(c) while executive scorecards have an element of collective accountability for the achievement of key f inancial measures, they also include individual accountability for performance at a business unit and individual level, as well as meeting risk and compliance gateways;

(d) the Board has discretion under the Remuneration Policy and current incentive plan rules to adjust the number of deferred shares and performance rights to zero where appropriate. This discretion can be exercised at any time during the vesting period or at the time vesting is due to occur;

(e) annual bonus pool allocations are determined on the basis of annual financial performance and risk measures. The risk measures include risk adjusted return on capital and consider performance against risk, compliance and audit matters and material adverse customer outcomes; and

(f) the Bank does not have a practice of providing sign-on payments. If such payments were to be contemplated, the Remuneration Policy requires the payment to be approved by the Board on recommendation by the Governance & HR Committee. Also, the Remuneration Policy does not provide for guaranteed bonuses.

62 There are, however, aspects of the Bank's remuneration framework which can be more closely aligned with APRA's expectations. For example, the framework will be reviewed to introduce long-term incentive performance measures linked to long-term financial soundness or risk adjusted performance. The deferral periods of variable remuneration will be reviewed having regard to the objectives of these remuneration components and the time horizon of risk.

63 The progress of the review, including proposed amendments to current remuneration policies and practices, is being overseen by the Governance & HR Committee.

64 Now produced and shown to me and marked RNJ-13 is a bundle of documents demonstrating changes recommended by the Governance & HR Committee to the remuneration system as a result of APRA's Information Paper, including:

(a) a copy of a decision paper put to the Committee for a meeting which took place on 14 May 2018 (BAB.5037.0001.1765). In that meeting, the Committee considered each of the findings set out in the Information Paper;

(b) a copy of a decision paper put to the Committee on 23 July 2018 which sets out recent amendments to the Remuneration Policy for greater alignment with APRA's standards (BAB.5037.0002.0438); and

(c) a copy of the minutes of the 23 July 2018 meeting {BAB.5037.0002.0432) in which the Committee resolved:

Signature

(i) in relation to APRA's findings on executive variable remuneration, that the Chairs of the Audit and Risk Committees should provide a declaration in relation to whether current or potential risks should be taken into account as part of the assessment of executive variable pay; and

Witness

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{ii) in relation to the Managing Director's short-term variable remuneration, that the Managing Director should provide a self-assessment against the short term incentive objectives for review by the Committee.

65 The steps required by the Bank will be finalised once the guidance papers are released by APRA.

Banking Executive Accountability Regime

66 In accordance with the Australian Government's new Banking Executive Accountability Regime (BEAR) to commence 1 July 2019, the Bank will make any remuneration framework adjustments required to comply with BEAR in the related implementation timeframes. To do this, the Bank has engaged a consulting firm with a view to commencing work on identifying and engaging with the accountable persons and completing accountability maps as soon as possible.

67 The Governance & HR Committee is overseeing the implementation of the changes needed to comply with these requirements. Now produced and shown to me and marked RNJ-14 (BAB.5000.0003.0235) is a presentation given at a meeting of executives held on 6 December 2017 in relation to the BEAR regime and implementation steps to be taken by the Bank in the first half of 2018.

Review of long term incentive plan

68 The Board has initiated a review of the long term incentive plan to ensure the plan design remains contemporary and acts as an effective incentive for executives. In particular, the Bank is considering whether the weighting of the total shareholder return component of the long term incentive plan is appropriate.

Signatur Witness

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Question5

Provide a table setting out:

(a) the remuneration and incentives received by each Relevant Senior Executive in each of the past three financial years; and

(b) the expected remuneration and incentives for each Relevant Senior Executive (or, at least, the range of such remuneration and incentives) for 2018-2019.

For variable remuneration, identify the percentage of the maximum available variable remuneration received by each Relevant Senior Executive.

70 The table below sets out the remuneration for the Relevant Senior Executives for the 2016 financial year.

FY2016

Relevant Senior Executive Name Fixed Deferred STI max STI LTI LTI Base Base paid vested


Chairman Robert Johanson 558,544

Non-Executive Director Jan Harris 79.315

Non-Executive Director Jim Hazel 280,617

Non-Executive Director Jacqueline Hey 192,617

Non-Executive Director Robert Hubbard 192,617

Non-Executive Director David Matthews 285,117

Non-Executive Director Deb Radford 192,617

Non-Executive Director Tony Robinson 286,117


Managing Director Mike Hirst 1,379,100 947,402 400,000 0 745,422 0

Chief Financial Officer Richard Fennell 600,000 150,000 250,000 0 250,000 0

Chief Risk Officer Timothy Piper 575,000 125,000 100,000 0 200,000 0

Chief People Officer Richard Fennell 600,000 150,000 250,000 0 250,000 0 (equivalent)


Head of Group Assurance Melissa Grantham 224,475 0 30,750 0 0 0

Head of Consumer Banking Nick Carter 289,867 0 53,000 0 50,000 0

Head of Business Banking Stephen Gorman 317,493 0 58,046 0 50,000 0

Head of Wealth Paul Rohan 310,899 0 56,785 0 0 0

Head of Insurance Richard Baker 191 ,625 0 35,000 0 0 0

Signature Witness

%of max var.

rem

0%

0%

0%

0%

0%

0%

0%

0%

0%

BAB.9000.0003.0016

16

71 The table below sets out the remuneration for the Relevant Senior Executives for the 2017

financial year.

FY2017

Relevant Senior Executive Name Fixed Deferred STI STI LTI LTI Base Base max paid vested



Non-Executive Director Jan Harris 193,000








Managing Director Mike Hirst 1,379,100 745,422 400,000 240,000 745,422 0

Chief Financial Officer Richard Fennell 600,000 150,000 250,000 150,000 250,000 0

Chief Risk Officer Timothy Piper 575,000 125,000 100,000 40,000 200,000 0

Chief People Officer Richard Fennell 600,000 150,000 250,000 150,000 250,000 0 (equivalent)


Head of Group Assurance Melissa Grantham 224,475 0 30,750 12,000 50,000 0

Head of Consumer Banking Nick Carter 289,867 0 53,000 35,000 50,000 0

Head of Business Banking Stephen Gorman 328,752 0 60,046 0 50,000 0

Head of Wealth Paul Rohan 310,899 0 56,785 23,711 30,000 0

Head of Insurance Richard Baker 191 ,625 0 35,000 10,000 0 0

REDAC1W Irrelevant and Conftdenllal

Signature Witness

% of max var. rem

21%

30%

13%

30%

15%

34%

0%

27%

29%

BAB.9000.0003.0017

17

72 The table below sets out the remuneration for the Relevant Senior Executives for the 2018

financial year.

FY2018

Relevant Senior Executive Name Fixed Deferred STI STI LTI LTI Base Base max paid vested



Non-Executlve Director Jan Harris 197,454








Managing Director Mike Hirst 1,413,577 844,507 400,000 250,000 844,507 0

Chief Financial Officer Richard Fennell 620,000 160,000 250,000 156,250 250,000 0

Chief Risk Officer T aso Corolis 450,000 100,000 100,000 62,500 150,000 0

Chief People Officer Richard Fennell 620,000 160,000 250,000 156,250 250,000 0 (equivalent}


Head of Group Assurance Melissa Grantham 233,454 0 42,640 12,600 50,000 0

Head of Consumer Banking Nick Carter 304.684 0 55.650 16,367 50.000 0

Head of Business Banking Smith, Andrew 310,048 0 58,000 15,167 50,000 0

Head of Wealth Paul Rohan 317,118 0 59,414 19,071 30,000 0

Head of Insurance Richard Baker 206.408 0 37.700 6,000 0 I 0

Signatur W itness

% of max var. rem

20%

31%

25%

31%

14%

15%

14%

21%

16%

BAB.9000.0003.0018

18

73 T he table below sets out the expected remuneration for the Relevant Senior Executives for the

2019 financial year.

FY2019

Relevant Senior Executive Name Fixed Deferred STI STI LTI LTI

Base Base max paid vested



Non-Executive Director Jan Harris 201,780






Non-Executive Director Vicki Carter 201,780


Managing Director Marnie Baker 1,200,000 537,500 400,000 537,500

Chief Financial Officer Travis Crouch 430,000 100,000 100,000 160,000

Chief Risk Officer Taso Corolis 450,000 100,000 100,000 150,000

Chief People Officer Louise Tebbutt 425,000 65,000 100,000 100,000


Head of Group Assurance Melissa Grantham 285,531 0 53,000 TBD

Head of Consumer Banking Nick Carter 312,282 0 58,350 TBD

Head of Business Banking Andrew Smith 310,048 0 58,000 TBD

Head of Wealth Paul Rohan 323,541 0 60,602 TBD

Head of Insurance Andrew Robertson 191 ,625 0 35,000 TBD

Signatur Witnes s

% of max var. rem

-

BAB.9000.0003.0019

19

Question6

For each financial year beginning with the 2008-09 financial year, state the number of times that Bendigo and Adelaide Bank imposed each of the following consequences for reasons related to risk, compliance

or conduct:

(a) the amount of variable remuneration payable to a Relevant Senior Executive in that year was adjusted downwards (including to zero) ("in-year adjustmenfJ;

(b) a deferred amount of variable remuneration payable to a Relevant Senior Executive did not vest

("ma/us?;

(c) an amount of variable remuneration payable to a Relevant Senior Executive was deferred, or a deferred amount of variable remuneration payable to a Relevant Senior Executive was deferred

for an additional period, beyond any deferral period that would ordinarily apply to that component

of remuneration ("additional deferraf'?;

(d) an amount of variable remuneration paid to a Relevant Senior Executive was clawed back

("clawback'J;

(e) an amount of variable remuneration paid or payable to a Relevant Senior Executive was otherwise forfeited or not granted;

(f) the employment of a Relevant Senior Executive was suspended or terminated.

For each instance of in-year adjustment, ma/us or clawback, please indicate the size of the adjustment

(e.g. one third of the Relevant Senior Executive's variable remuneration) and briefly state the reasons for the adjustment.

For each instance of additional deferral, please indicate the period and size of the additional deferral,

whether the relevant amount ultimately vested, and briefly state the reasons for the additional deferral.

For each instance of suspension or termination, please briefly state the reasons for the suspension or termination.

Background

74 Under the Bank's Remuneration Policy, there is no automatic entitlement to variable remuneration, or presumption that variable remuneration will be paid, even if an individual meets his or her personal targets. A decision as to whether variable remuneration will be paid, and if so in what amount, is not made until well after the end of the financial year.

Short Term Incentive Plan

75 As stated at paragraphs 34 to 37 above, the Bank's short term incentive plans are designed to reward an individual for his or her contribution to the collective performance of the organisation, rather than their performance against individual goals.

76 At the start of each financial year, the Board sets the maximum potential bonus pool for that year. In recent years, the maximum potential bonus pool has been set at approximately 45% of all maximum short term incentive opportunities all salaried employees (including the Relevant Senior Executives).

77 As described in section 3.3 of the Remuneration Report, the Bank must achieve a pre-determined minimum annual result, also set by the Board at the start of each financial year, as a condition for the establishment of an annual bonus pool. If that minimum annual result is not achieved, no bonus pool will be established and hence no short term incentive awards will be made.

Signatur Witness

BAB.9000 .0003.0020

20

78 If the minimum annual result is achieved, the Board sets the size of the actual bonus pool after financial year-end, on recommendation from the Governance & HR Committee. In deciding the amount of any bonus pool, the Board will assess the appropriate balance of the sharing of the outperformance between employees and shareholders, and the required capital to generate funds (see section 4.3 of the Remuneration Policy). In doing so, the Board has regard to:

(a) Financial measures. This includes cash earnings achieved in excess of a target minimum shareholder return and return on equity.

(b) Risk measures. This includes adjustment of the pool to reflect the types and levels of risk involved in the performance, and the overall risk appetite of the Bank. Specifically, a risk adjustment may be made in consideration of:

(i) the business mix which contributes to the Bank's cash earnings result versus the budgeted business mix;

(ii) risk-adjusted return on capital I economic profit;

(ii i) prudential balance sheet metrics achieved;

(iv) performance in relation to any risk, compliance or audit matters to account for any unexpected or untinended risk outcomes; and

(v) material adverse customer outcomes.

79 Where the bonus pool amount (if any) as determined by the Board after the end of the financial year is less than the maximum potential pool set at the start of the financial year, the maximum short term incentive opportunity for each participant (including the Managing Director and other Relevant Senior Executives), is proportionately adjusted downwards. Any short term incentive

award is then determined for each participant.

80 The Board considers the Managing Director is best placed to assess the individual performance and overall contribution of the Relevant Executive Committee Members. Accordingly, the Managing Director determines any proposed short term incentive for each Relevant Executive Committee Member (other than the Managing Director) and direct reports to the CEO, based on the achievement of the individual's financial and non-financial measures, including risk, compliance and conduct measures. The proposed award is then recommended to the Governance & HR Committee and Board.

81 The Governance & HR Committee and Board then review the Managing Director's recommendations and make any appropriate adjustment to ensure the awards reflect performance at an organisational, divisional and individual level.

82 In relation to the Managing Director, the Governance & HR Committee assesses the Managing Director's performance after financial year-end based on the achievement of measures set at the start of the financial year, to determine any short term incentive award for recommendation to the Board. When considering the recommendation, the Board considers whether it should exercise its discretion to factor into its assessment any unforeseen developments or risk and compliance adjustments.

83 For each of the Other Relevant Senior Executives (who are not members of the executive committee or direct reports to the Managing Director), any short term incentive award is determined by the manager of their business division under the VCD Plan described at paragraph 21 above, and reviewed and approved by the manager's manager.

84 As part of the foregoing process, meeting risk and compliance requirements is a gateway for a sho noted in section 4.2 of

Signature Witness

BAB.9000.0003.0021

21

individual, team or the Bank as a whole does not meet or only partially meets risk and compliance requirements, or the individual does not demonstrate behaviour in line with the Bank's corporate values, no award or a reduced award will be made. In the financial years beginning in the 2008-09 year, no Relevant Senior Executive has failed to pass these gateways.

Long Term Incentive Plan

85 As stated at paragraphs 38 to 39 above, the Bank's long term incentive plan is available to a limited number of the Bank's employees if performance conditions have been met over the course of a three, or in the case of the Managing Director four. year period. The Board subsequently has an absolute discretion to adjust the number of performance rights that vest for risk. compliance and conduct reasons.

86 In the 2008-09 and subsequent financial years, the performance conditions for the vesting of performance rights under the Bank's long term incentive plan have been met on very few occasions. This is primarily due to the relative total shareholder return measure not being satisfied.

Answer to Question 6

87 Given the operation of the Bank's short tefm incentive plan, as described above, there have not been any instances since the start of the 2008-09 financial year where, for reasons related to risk, compliance or conduct, the Bank imposed any of the consequences set out in subparagraphs (a) to (e) of Question 6 in respect of an amount of variable remuneration that had been paid or had become payable to a Relevant Senior Executive under that plan.

88 Nor has such an event occurred during that period in relation to any amount under the long term incentive plan in respect of the Relevant Senior Executives.

89 Relevant Executive Committee Members also receive a "deferred base" component of remuneration, as discussed at paragraph 13 above. The Bank does not consider •deferred base" to be variable remuneration. However, I note that it is subject to adjustment at the Board's discretion (discussed at paragraph 40 above). There have not been any instances since the start of the 2008-09 financial year in which the deferred base component of any Relevant Executive Committee Member's remuneration did not vest, was deferred for an additional period beyond any deferral period that would ordinari ly apply, or was clawed back, for risk, compliance or conduct reasons.

90 In answer to subparagraph (f) of Question 6, no Relevant Senior Executive has been suspended or terminated for risk, compliance or conduct reasons since the start of the 2008-og financial year.

Question 7

When were each of the key features of the current system of remuneration for Relevant Senior Executives (excluding non-executive directors) established by Bendigo and Adelaide Bank (BAB)? In answering this question, the key features should be interpreted as including weighting remuneration towards base pay.

91 The key features of the Bank's current system of remuneration for Relevant Senior Executives (excluding non-exective directors) were established in the 2010 financial year in respecl of the Managing Director, and the 2013 financial year in respect of the other Relevant Senior Executives. as described in the Bank's full financial reports for those financial years. Now produced and shown to me and marked RNJ-1 5 are relevant extracts of the Bank's 2010 full

report (BAB.5039.0003.0054) BAB.5039.0

Signature Witness

BAB.9000.0003.0022

22

92 As stated in the 2010 report, during the 201 O financial year. a working group, reporting to the Governance & HR Committee, was established to conduct a comprehensive review of the Bank's

remuneration strategy and arrangements taking into account new APRA requirements and shareholder response to the 2009 Remuneration Report.

93 That review culminated in the development of a new remuneration policy for the Bank, which was adopted by the Board in May 201 O, on the recommendation of the Governance & HR Committee.

The policy was built on the Bank's existing remuneration policy, and provided significantly more detail. The key features present in the 2011 remuneration policy included:

(a) the weighting of remuneration towards base pay;

(b) the structure of the short term incentive plan, including the single bonus pool shared by all salaried employees, and deferral of a portion of any short term incentive payment;

(c) the structure of the long term incentive plan; and

(d) a Board discretion to apply risk adjustments to short and long term incentive payments.

94 As stated above, the 2011 remuneration policy built on the Bank's existing remuneration policy,

and did not represent a significant departure from the Bank's existing principles regarding remuneration. As stated at paragraph 31 above, the Bank has historically weighted remuneration

towards base pay. As far as I can recall, it has done so since at least 1988 when I joined the Bank.

Question 8

Over the last five years, what have been the aims of BAB 's system of remuneration for Relevant Senior

Executives {excluding non-executive directors) of BAB? Exhibit any relevant documents.

95 The aims of the Bank's system of remuneration for the Relevant Senior Executives are identified in the purpose and principles of the Bank's Remuneration Policy (exhibit RNJ-3,

BAB.5038.0001 .0053), as described at paragraph 29 above.

96 The purpose of the Remuneration Policy is "to provide a framework for remuneration to attract, retain and motivate employees to achieve the objectives of the organisation within its risk appetite and risk management framework".

97 The Bank's guiding principles for its remuneration framework are:

(a) simplicity;

(b) transparency and procedural fairness;

(c) alignment with the Bank's values;

(d) appropriate risk behaviour; and

(e) supporting good customer outcomes.

98 The aims of the Bank's system of remuneration for the Relevant Senior Executives have been consistent with this purpose and these guiding principles over the last five years.

Signatu r Witness

BAB.9000.0003.0023

23

Question 9

Why has the Board of BAB long held the view that "remuneration which is leveraged towards short-term performance can create a disconnect between the individual's interests and the long-term interests of

shareholders and other stakeholders, especially customers, including increasing the risk of poor culture within an organisation"? When did BAB first form that view? Exhibit any relevant documents.

99 The Board has long held the view that remuneration which is leveraged toward short-term performance can create a disconnect between the individual's interests and the long-term interests of shareholders and other stakeholders, especially customers, because it can create the potential for inappropriate behaviour and risk taking. As far as I can recall, the Board has held this view since at least 1988 when I joined the Board.

100 The Bank's strategy is to be Australia's bank of choice by focussing on the success of our customers, people, partners and communities. The Board considers that the risks associated with a short-term performance focus are incompatible with this strategy. Accordingly, the Bank has sought to limit variable remuneration to a level that reduces these risks.

101 By way of a particular illustration of these matters, now produced and shown to me and marked RNJ-16 are copies of two letters from the Bank to Blackrock Asset Management Australia dated 11 October 2016 (BAB.5039.0003.0004) and 24 October 2018 (BAB.5039.0003.0001 ).

Question 10

Does BAB consider that its system of remuneration for Relevant Senior Executives (excluding non

executive directors) has been effective in achieving its aims over the last five years? Exhibit any relevant

documents.

Question 11

How has BAB measured the effectiveness of its system of remuneration for Relevant Senior Executives

(excluding non-executive directors) in achieving its aims over the last five years? Exhibit any relevant

documents.

102 As stated above, the purpose of the Bank's remuneration framework is to attract, retain and motivate employees to achieve the objectives of the organisation within its risk appetite and risk management framework. The Bank's principal objective is to be Australia's bank of choice. The Bank has been independently recognised as Australia's most trusted bank, and has a leading "net promoter score" among its peers. The Bank has also had strong sustainable financial success over the last five years. In these regards, the Bank considers that its system of remuneration for Relevant Senior Executives has been effective in assisting the Bank to achieve its aims over the last five years. The Board also believes that this approach has assisted the Bank in avoiding some of the issues that have affected other participants in the industry in recent times.

103 As stated at paragraphs 49 to 52 above, the Bank regularly assesses its remuneration arrangements, including their effectiveness in achieving the Bank's aims, and makes changes and refinements as considered appropriate.

REDACTED lrrele• ant and Confldential

Signatur Witness

BAB.9000.0003.0024

24

Question 12

Since ceasing to provide its employees with incentives directly linked to products and the achievement of

sales targets. has BAB observed any reduction in misconduct or conduct that falls below community standards and expectations by its employees? If so, how has that effect been identified and evaluated?

Exhibit any relevant documents.

104 The Bank ceased providing its employees with incentives directly linked to products and the

achievement of sales targets many years ago. At the time this decision was made, the majority of

the Bank's incentives directly linked to products were associated with its wealth business. which was established as a joint venture with IOOF in 1999, and subsequently wholly acquired by the Bank in 2002. The decision to cease providing sales-based incentives was made by management

as a proactive measure in order to align the remuneration structures of the wealth business with the broader remuneration structure of the Bank. It was not made in response to any particular

occurrences of misconduct.

105 Given the amount of time that has elapsed since this change to the remuneration structure, that

the change was made relatively quickly after the 100% acquisition of the wealth business, and

that this change was only applied to a limited part of the Bank's business (which has changed significantly since that time), I am unable to express a view as to whether there has been any reduction in misconduct or conduct falling below community standards and expectations by the

Bank's employees since this decision was made and implemented.

Signatur Witness

Name Name Andrew Langton Burns

Date 7 November 2018 Date 7 November 2018

bendigo and adelaide bank limited date - royal commission · 2019. 10. 18. · bab.9000.0003.0002 2...

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