APRA CPS 511 Remuneration: deferral, malus and clawback explained

What CPS 511 is

APRA's Prudential Standard CPS 511 (Remuneration) establishes requirements for how remuneration arrangements are designed, governed, and operated within APRA-regulated entities. These arrangements cover all remuneration, including salaries, bonuses, and other incentives. The standard aims to ensure remuneration practices support safety and soundness. CPS 230 readiness scorer

The standard’s implementation timeline varied based on an entity’s classification. Significant financial institutions (SFIs) were required to comply from 1 January 2023. Non-SFIs had a later commencement date, needing to be compliant from 1 January 2024.

CPS 511 applies to a range of regulated entities, including Authorised Deposit-taking Institutions (ADIs), insurers, and Registered Superannuation Entity (RSE) licensees.

Variable remuneration deferral

Variable remuneration for accountable persons in specified roles at registered Superannuation Financial Institutions (SFIs) is subject to minimum deferral requirements. At least 40% of variable remuneration must be deferred for a period of no less than 4 years. This requirement applies to accountable persons holding these specified roles.

The CEO of an SFI is subject to a higher deferral percentage. A minimum of 60% of the CEO’s variable remuneration must be deferred over a period of 4 years. Non-SFIs are also subject to deferral requirements, although the rules are less stringent than those applying to SFIs, but follow a similar structure. director duties self-check

The deferred portion of variable remuneration is crucial as it provides the timeframe necessary for the application of malus and clawback mechanisms.

Malus and clawback

Malus and clawback are mechanisms to address unacceptable risk-taking or conduct within an APRA-regulated entity. Malus refers to the ability to reduce unvested deferred remuneration before it vests. This occurs in response to specific risk or conduct outcomes.

Clawback, conversely, enables the recovery of variable remuneration that has already been vested or paid. Both malus and clawback are designed to ensure accountability and discourage behaviours that could negatively impact the financial system.

CPS 511 requires entities to establish arrangements that permit the application of both malus and clawback. These arrangements must be triggered by defined circumstances, including instances of financial misconduct, material risk events, and breaches of accountability obligations under the Financial Accountability Regime.

Governance + non-financial measures

The Board retains direct accountability for remuneration outcomes, ensuring oversight of the design and implementation of variable remuneration frameworks. This accountability extends to recognising and addressing the impact of remuneration decisions on the organisation’s overall risk profile and conduct.

Variable remuneration design must incorporate material non-financial measures alongside financial KPIs. These measures, which may relate to risk and conduct, are intended to encourage behaviours aligned with the organisation’s objectives and regulatory expectations. Performance assessment processes should facilitate a holistic view, capturing both financial performance and non-financial behaviours, including instances of breaches.

The Financial Accountability Regime (FAR) reinforces individual accountability. CPS 511 deferral arrangements provide the mechanism through which malus and clawback actions can be applied against accountable persons.