Government bank executives got a pleasant surprise today, which came from none other than the governor of Reserve Bank of India (RBI). While mentioning the issue of compensation of private bank chief executive and board members, RBI Governor D Subbarao emphasised the need for competitive compensation for public sector banks or they may lose talent to their private sector counterparts.
“If public sector banks are required to compete with private banks on a level playing-field, there is a good case for compensating them, too, on a competitive base,’’ said Subbarao. “There is also the risk that if the public sector bank compensation is not improved, the public sector may lose talent to the private sector.’’
The governor’s comments come at a time when the central bank is battling with the finance ministry on the issue of revising the salaries of its own employees. The central bank typically revises these salaries and then informs the ministry. The ministry now wants RBI to seek prior approval of the changes.
“Executive compensation in the public sector, as is well known, is lower than that in the private sector,’’ said Subbarao. “Notwithstanding the historical reasons for this, there is, perhaps, a good reason to revisit this.’’
The central bank in July released draft guidelines regarding compensation of whole-time directors, chief executive officers, risk takers and control staff, as the regulator wants to ensure effective governance of compensation and alignment with prudent risk taking.
The guidelines require banks’ boards to formulate and adopt a comprehensive compensation policy covering all employees (risk takers and control/compliance staff). Limit on variable pay is, however, not proposed.
Since public sector banks account for 70 per cent of the Indian market, where compensation is determined by the government, the variable component is very limited.
“The proposed reform to compensation structures is relevant in India only to the remaining 30 per cent of the non-public sector industry segment,” Subbarao said.
In its July communication, RBI said flawed incentive compensation practices in the financial sector were one of the important factors contributing to the recent global financial crisis.
| MIND THE GAP PAY OF PRIVATE SECTOR BANK CEOS ('lakh) | ||
| Name of executive | Bank | Gross pay |
| Chanda Kochhar | ICICI Bank | 208.74 |
| Aditya Puri | HDFC Bank | 340.85 |
| Shikha Sharma | Axis Bank | 152.16* |
| PAY OF PUBLIC SECTOR BANK CEOS | ||
| O P Bhatt | State Bank of India | 26.51 |
| M D Mallya^ | Bank of Baroda | 23.30 |
| Alok Misra # | Bank of India | 7.99 |
| *from June 1 ‘09 to March 31 ‘10 (all figures for 2009-10 excluding ESOPs) # from August 5 ‘09 to March 31 ‘10 ^includes arrears for 6th Pay Commission | ||
Employees, too, were often rewarded for increasing short-term profit without adequate recognition of the risks their employees’ activities posed to the organisations, RBI then said. Rs Rs These perverse incentives amplified the excessive risk taking that severely threatened the global financial system. The compensation issue has, therefore, been at the centre-stage of regulatory reforms.’’
Foreign banks are required to submit an annual declaration that their compensation structure in India is in conformity with Financial Stability Board principles and standards.
