Banking royal commission: NAB chief Andrew Thorburn steps through Hayne’s pay ‘trap’

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Banking royal commission: NAB chief Andrew Thorburn steps through Hayne’s pay ‘trap’

National Australia Bank chief executive Andrew Thorburn deserves some sort of medal for managing to get his company’s core purpose statement – backing the bold who take Australia forward – into his evidence at the royal commission.

The demeanour of most bank executives has swung between terrified, contrite, defensive and dismissive. Thorburn, sporting a dark blue checked suit and pink tie, showed no sign of nerves.

His high-energy, expansive personality was on display from the get-go on Monday morning, as senior counsel assisting Michael Hodge took him straight to a letter Thorburn had written to the commission, identifying four key reasons the banking sector has ended up in the mess it find itself in.

These were: The sector’s focus has shifted away from customers and put profits before people; it has moved from a long-term view to a short-term one; remuneration has shifted from base pay to incentives, often based on short-term targets; and the banking sector has generally become more complex.

Hodge gave Thorburn plenty of rope as he explained, quite eloquently really, how the banking sector had “drifted” towards this focus on the short-term. Before long, Thorburn was spouting the purpose statement he and chairman Ken Henry devised two years ago to held stop this drift.

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And that was when Hodge gently dropped the hammer.

“It sounds so complicated when you say it, but you’re a bank. Presumably your purpose is to be a bank. Is it?”

The gallery giggled and Thorburn grinned and gave Hodge a thumbs up, acknowledging the QC’s score.

“It seems like as a bank your purpose would be to take deposits and lend money and to do that as well as you could. Is that over simplifying?”

NAB CEO Andrew Thorburn:
NAB CEO Andrew Thorburn: “I think the first thing is that we’ve had the wrong incentive schemes in many cases. We’ve had the wrong incentive schemes.”

David Rowe

Thorburn agreed those were the functional activities or a bank, but insisted the purpose and vision still matter.

“All banks do that. If you can have a purpose and a vision that really orientate your people from their head and their heart to living the purpose and vision … hopefully you’re an even better bank than others. But they’re two separate things.”

Not surprisingly, Hodge zeroed in the question of remuneration, taking Thorburn through the way NAB has changed its variable remuneration – don’t call it a bonus, for goodness sake! – to make them less about rewarding short-term behaviour and more about driving sustainable growth.

Thorburn explained how NAB has made changes to make its variable remuneration an annual payment, based not just on financial targets but also by customer and risk-related targets.

Hodge, perhaps reading the mood of the gallery behind him, kept at it.

“I’m concerned you think I’m trying to trap you,” Hodge said with a smile, “when I’m just trying to get you to agree to what seems to me to be a very basic proposition about how a capital lift society works. Which is…variable remuneration is something that you’ve obviously found in your bank is an effective way to motivate people to achieve particular outcomes?”

Thorburn winced slightly. ” So…on the basis of no trapping, I think the first thing is that we’ve had the wrong incentive schemes in many cases. We’ve had the wrong incentive schemes.”

He gave the example of NAB’s introducer program, which saw NAB paying cash rewards to a network of contacts who send home loan inquiries its way. “We put the bait right there for people. Right there. They stepped over the line. That’s their own decision. I’m not excusing that. But we put incentive schemes in place.”

“But now we’ve got a variable reward scheme where it’s annual, it’s centralised, based on achieving a number of things across four or five key result areas, it’s deferred, deferred for the longer term for executives. It’s starting to get more sustainable.”

Could NAB eliminate variable pay and return to fixed pay only, Hodge asked.

Thorburn said it was worth considering for front-line staff, where bonuses were relatively small. For executives, it would be harder, because of the global talent pools NAB was trying to tap.

“I would have some concerns about abolishing it because I think for Australia, less competitive I don’t think we would be able to attract the people we need to make our banking system really excellent.”

Hodge then took Thorburn to the pay structure for a banker as it stands. The diagram was so complex that even Thorburn admitted he was left peering at his screen in the witness box, trying in vane to zoom in on the static screen as if it was an iPad.

The diagram showed seven main key performance indicator for the staff member, each worth 14.29 per cent of their base pay. There were four parts of the bonus payment; one, but only one, was connected to financial goals, under the heading of “generating attractive returns”.

“And I suppose what I wonder is, in the end, are employees going to find this to be a more or less transparent structure?” Hodge asked.

“Well, I think it’s transparent. But I think we’re on a journey on this one, Mr Hodge because, you know, it’s complex. And I think we need to simplify it.”

“Is this the simplified version?

“No, it needs to be simplified.”

Enter Commissioner Ken Hayne, with his traditional cut to the heart of the matter question.

“Mr Thorburn, what message does the person who is the subject of this plan take away from it …What behaviours do you regard this system as reinforcing?

“Well, one of the things we say in our values, Commissioner, is to do the right thing. So the first thing is that you are really building a relationship with customers and you are listening to them in order that you can look after their needs better. Secondly…we need to have some element of a growth mindset in the organisation. And then….the final behaviour is that risk is my responsibility.”

Hodge probed as to whether the “generate attractive returns” component of an employee’s performance really met the requirements of the Sedgwick review, which sought to eliminate sales-based pay targets for front-line staff.

Thorburn batted this point away successfully too, arguing that the balanced scorecard approached ensured there wasn’t a singular focus on this area.

James Thomson

j.thomson@fairfaxmedia.com.au

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