The Australian Prudential Regulation Authority (APRA) plans to limit the focus on financial performance benchmarks in corporate incentive packages as it seeks to elevate the importance of culture and customer outcomes.

Financial metrics would not comprise more than 50% of performance criteria for variable remuneration as part of the proposed changes.

APRA Deputy Chairman John Lonsdale says remuneration and accountability frameworks are important in driving behaviour and there has been an over-emphasis on short-term financial performance and a lack of accountability when failures occur – especially among senior management.

“This has contributed to a series of damaging incidents that have undermined trust in both individual institutions and the financial industry more broadly,” he said in a statement.

“Crucially, from APRA’s perspective these incidents have damaged not only institutions’ reputations, but also their financial positions.”

APRA will also introduce minimum deferral periods of up to seven years for senior executives in larger, more complex entities, with boards able to recover the reward up to four years after it has vested.

Mr Lonsdale says this will ensure executives have “skin in the game” for longer and allow boards to adjust remuneration downwards if problems emerge over an extended horizon.

“We want to empower boards to more effectively incentivise behaviour that supports the long-term interests of their entities,” he says.

“By reducing the risk of misconduct, we hope to see better outcomes for customers and higher returns for shareholders in the long-term.”

Consultations on the proposals close on October 22 and APRA will publish a response to submissions and final prudential standards late this year or early next year. The new rules are expected to take effect from July 1 2021, with a transition period.