The RBI today proposed limiting annual salary increases of CEOs or wholetime directors of private banks to 10-15 per cent, besides a provision for slashing remuneration in case of poor financial showing.
The proposals were part of the draft regulations on compensation of private sector, local area and foreign banks and are significant given the fact that high salaries and bonuses of bankers (despite their institutions faring badly) were blamed for the 2008 global financial meltdown.
"In case of wholetime directors, CEOs the annual increase in fixed pay should not be generally more than the range of 10-15 per cent," the draft said.
In the draft, the RBI said guaranteed bonuses are not consistent with sound risk managements or productivity-linked principles and proposed that they should not be a part of the compensation plan.
As such, bonus should only be given for hiring new staff and be limited only to the first year, the draft said.
However, this payment should be in the form of employee stock option (ESOPs) only, since advance payments would create "perverse" incentives and promote undue risk taking.
Releasing the much-awaited draft guidelines on compensation of CEOs and WTDs as well as other staff, the RBI, however, suggested autonomy for private sector banks for paying perquisites to the senior staff in line with the existing practices.
The central bank also proposed that private sector banks must ensure that there is a proper balance between fixed pay and variable pay.
"At higher levels of responsibility, the proportion of variable pay may be higher. The variable pay could be in cash, stock-linked instruments or mix of both," the draft proposal said.
However, deterioration in financial performance of the banks should generally lead to contraction of variable pay.
Where the variable pay constitutes a substantial portion of total pay, 40-60 per cent of this remuneration must be deferred for a minimum of three years.
A substantial portion of deferred variable pay should be awarded in shares or share-linked instruments like ESOPs and should conform to SEBI guidelines.
The remaining portion of deferred compensation should be paid as cash compensation gradually.
In case, there is negative contribution of the bank in any year during these three years, any unpaid portion of deferral compensation should be clawed back.