The Reserve Bank of India (RBI) is likely to announce its draft guidelines on the compensation packages of private sector bank chiefs by next month, a move aimed at aligning the salary structures with business performance.
“The indications are that the draft paper will be out by March. This would be aimed at putting a framework in the way banks compensate their CEOs and other top executives,” a source in the know said. In the mid-term policy review, RBI Governor D Subbarao had said the apex bank was working on the principles outlined in the Financial Stability Board for sound compensation and will come out with norms to ensure healthy practices in the compensation policies of private and foreign banks.
The Governor had highlighted the compensation practices, especially that of bigger financial institutions, as one among the factors that contributed to the recent global financial crisis.
In the G-20 meet last year, the leaders had expressed concerns over the high compensation packages of top bank executives, which, they argued was a not a positive sign in a healthy financial system. With a view to align the compensation with long-term value creation, the G-20 leaders had urged central banks to formulate compensation policies. However, each country will have to adopt its own norms.
The agreements reached in the G-20 summit discourage bonus guarantees extending more than one year. Besides, the bonuses should be linked to their individual contribution and performance in the organisation, it said.
“What the RBI is trying to do is to rationalise the remunerations of CEOs and other key employees in private and foreign banks, as they feel that it is important for the health of the individual firm and the system as a whole,” the source said.
Presently, the salaries of top executives in private and foreign sector banks are approved by the central bank after the individual bank’s board clears the proposals. Last year, the Reserve Bank had reportedly expressed its concerns on the compensation packages of at least three private sector banks, as they felt the structure was not in line with market standards.