Thursday , May 13 2021

Banking royal commission: Macquarie's (ASX: MQG) Model Model

The commission was, however, less interested in a culture and approach to compliance and risk management within Macquarie Equities that was described as "shambolic" than Macquarie did to fix it.


Moore's explanation for what went wrong in a business that was transitioning from an old-style retail broking business to a wealth management operation was that, while the people in the division recognized that change was necessary, they did not realise the urgency required.

There was also a management failure.

"From a structural point of view, we had compliance reporting in the business itself," he said.

That was a failure of design. Compliance should, he said, be independent of business so that it could provide a challenge to the way the business thought about the world and the requirements it needed to meet.


It was also a departure from one of the core aspects of the "Macquarie Model," where risk management and compliance are kept at arm's-length from the bank's operating divisions. He described compliance as the group's second line of defense, with third-party internal audit.

Macquarie removed the compliance functions from the business, relocating them to its central legal and compliance unit, sacked the head of advice and halved the variable remuneration of the leader of the largest banking and financial services unit within which Macquarie Equities was housed – despite that unit's profit for the year being 22 percent higher than the previous year.

The commission, which has had some of the focus on bankers receiving their bonuses despite the costly debacles on their watches, was clearly impressed by the demonstration of actual accountability and the link between non-financial performance and reward.

"One of our key tenets is accountability," Moore said. Compliance failures had implications for employment, remuneration and promotion.

Both Hodge and the commissioner, Ken Hayne, were interested in the relationship between the "unique" Macquarie remuneration model, the longevity of its senior staff (Moore, who retires next week, has been at Macquarie for 32 years) and its culture.

Commissioner Kenneth Hayne was clearly interested in the Macquarie approach, asking whether it or elements of it could have a wider application within the system.

Commissioner Kenneth Hayne was clearly interested in the Macquarie approach, asking whether it or elements of it could have a wider application within the system.Credit:Brook Mitchell

Macquarie does not have the conventional bank remuneration model, with variable pay-bonuses, which has a fixed relationship with the base pay and which is increasingly valued using some form of balanced score card.

Macquarie employees have a profit-sharing relationship with their shareholders, with the variable elements of their remuneration coming out of their share of the profits. It's a structure that, to varying degrees, is used throughout all levels of the group.

For senior staff, that variable component will be much larger than their fixed pay – in Moore's case it was about 80 percent of his total remuneration – and the fixed element is set low by general corporate standards. There is no relationship between fixed and variable components.

There is no limit on the upside (hence Macquarie being dubbed the "millionaires' factory"), but large proportions of the variable rewards are deferred for quite long periods. In Moore's case, that ranged from three to seven years.

Moore said there were four key inputs in calculations of individuals' variable pay: financial performance; risk-management and compliance; business leadership, including client outcomes and people leadership; and professional conduct. There are no weightings given to any of these inputs – the proportion of variable pay awarded is a subjective decision.

Macquarie's unusual remuneration structure – the profit-sharing and the lengthy deferrals – is to align employees' interests with those of shareholders and customers / clients.

Hayne was clearly interested in the Macquarie approach, asking whether it or elements of it could have a wider application within the system.

Moore said profit-sharing was far more powerful than bonuses, and the deferrals, longevity of senior executives, and accountability at all levels of the group were elements both in establishing the group's culture and creating a long-term alignment of interests with shareholders and clients.

Given the wider debates on corporate remuneration and variable pay in particular, the key elements of the Macquarie model – the absence of any relationship between fixed and variable components, lengthy deferrals and variable awards that reflect real accountability – provide a model that boards of other large companies might at least consider.

Stephen is one of Australia's most respected business journalists. He was a co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.

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