The Reserve Bank of India (RBI) has proposed a cap on annual salary increments of chief executive officers and whole-time directors of banks which are not state-run. It has also proposed to link salaries to the risk and responsibility of the officials.
RBI, in a draft regulation on compensation of top officials of private banks, local area banks and foreign banks, attributed flawed compensation practices in the financial sector as one of the important factors contributing to the recent global financial crisis.
All private banks will have to submit their compensation structure to RBI for 2011-12 by December 31.
In addition to a cap on increments, the draft proposes to reduce compensation in case of poor financial performance. “Deterioration in the financial performance should generally lead to a contraction in the total amount of variable remuneration paid,” said the draft, to which RBI has sought public comments by July 31.
Banks would also have to ensure a balance between fixed pay and variable pay, said the draft. At the same time, private banks would have the freedom to pay higher variable pay at higher levels of responsibility. The variable pay could be in cash, stock-linked instruments or a mix of both, said the draft. It also proposes that where the variable pay accounts for a substantial part of the total pay, 40-60 per cent of it must be deferred for at least three years.
“A substantial proportion of deferred variable pay should be awarded in shares or share-linked instruments (ESOPs etc) as long as these instruments create incentives aligned with long-term value-creation and the time horizons of risks,” the draft said.
However, the grant of share-linked instruments will have to be in line with the Securities & Exchange Board of India guidelines. The remaining portion of the deferred compensation should be in cash, said the draft.
Banks should have to provide for variable pay within three years in case of deferred variable pay. Guaranteed bonuses would not be included in compensation as they were not consistent with sound risk management, said the draft.
In case of foreign banks, while approving CEOs’ salaries, RBI will take into account the annual declaration from head offices regarding the compensation structure, including that of the CEO concerned.
“In case it is observed that the compensation is not properly aligned to risks or there are other regulatory and supervisory compliance issues in relation to the Indian operations, the issue will be appropriately taken up with the home country regulator on a case-to-case basis,” said the draft.
