Submission to the Australian Senate Inquiry into ‘Quality of governance at Australian higher education providers’
3 March 2025

The purpose of this submission is to flag an opportunity for improving university governance by addressing adverse agent/principal behaviour through the use of deferred compensation schemes. Specifically, to resolve the mismatch between remuneration received based on current observed performance and unobserved risky behaviour, or malpractice, which manifests at some point in the future.

Deferred Compensation Scheme
Banking industry has generated numerous high-profile cases where mismatches in timing between an employee’s earnings and the full consequence of their performance observed over long time frames. In response to this problem of governance, banks and regulatory bodies have implemented deferred compensation schemes. By deferring some of a bank employee’s compensation to a future date, an employee is motivated to ensure actions are aligned with the bank’s long-term viability and performance. Many deferred compensation plans include clawback provisions, allowing banks to reclaim payments if employees engage in misconduct or cause financial harm.

Deferred compensation schemes have regulatory precedent in Australia with Australian Prudential Regulation Authority’s (APRA) Prudential Standard ‘CPS511 Remuneration’.
The key requirements of the Remuneration standard are:

• the Board of an APRA-regulated entity is responsible for the remuneration framework and its effective application, consistent with the size, business mix and complexity of the entity;
• remuneration outcomes must be commensurate with performance and risk outcomes; and
• higher standards must be met for key roles and certain large, complex entities.
  

https://www.apra.gov.au/sites/default/files/2021-08/Final%20Prudential%20Standard%20CPS%20511%20Remuneration%20-%20clean_0.pdf.

An APRA-regulated entity must defer variable remuneration as follows:

(a) for a Chief Executive Officer (CEO), at least 60 per cent of the CEO’s total variable remuneration must be deferred over a minimum deferral period of six years, vesting no faster than on a pro-rata basis and only after four years;

(b) for a senior manager and executive director other than a CEO, at least 40 per cent of that person’s total variable remuneration must be deferred over a minimum deferral period of five years, vesting no faster than on a pro-rata basis and only after four years.

A similar remuneration standard could be created to improve university governance.

Recommendation:

• Vice Chancellors should have at least 40% of their total renumeration deferred;
• University executive officers, including Deputy & Pro-Vice Chancellors, Deans, Chief Operating Officers, Chief Information Officer, and Chief Financial Officer, should have at least 20% of their total renumeration deferred;
• 50% of deferred remuneration vesting after 5 years and the remaining 50% vesting after 10 years to reflect the unique long lag times in observing educational and organisational outcomes of universities;
• That there be a national fund into which university deferred compensation is placed and administered.