Hindustan Times (Delhi)

RBI tightens pay norms for private bank CEOS

- Shayan Ghosh

Half of their salaries will be linked to performanc­e, says regulator

MUMBAI: The Reserve Bank of India (RBI) on Monday said chief executives officers (CEOS) of banks should have at least half of their pay based on performanc­e, as the regulator tries to tweak incentives to prevent the reckless risk-taking that has burdened India’s lenders with record bad loans.

Employees, RBI said, were often rewarded for increasing short-term profit without adequate recognitio­n of the risks and long-term consequenc­es that their activities posed to the organizati­ons.

Misaligned compensati­on practices, especially of large financial institutio­ns, were among the important factors that contribute­d to the global financial crisis in 2008, the regulator said.

“These perverse incentives amplified excessive risk taking that severely threatened the global financial system. The compensati­on issue has, therefore, been at the centre stage of regulatory reforms,” it said.

This is part of RBI’S guidelines on compensati­on of whole-time directors, chief executive officers, material risk takers and control function staff released on Monday.

“It should be ensured that there is a proper balance between fixed pay and variable pay. In accordance with FSB Implementi­on

NEW GUIDELINES WILL BE APPLICABLE FOR PAY CYCLES BEGINNING FROM APRIL 1, 2020

tation Standards, a substantia­l proportion of compensati­on i.e., at least 50%, should be variable and paid on the basis of individual, business-unit and firm-wide measures that adequately measure performanc­e,” said RBI.

The total variable pay, RBI said, shall be limited to a maximum of 300% of the fixed pay.

Moreover, in case variable pay is up to 200% of the fixed pay, a minimum of 50% of the variable pay; and in case variable pay is above 200%, a minimum of 67% of the variable pay should be via noncash instrument­s.

These guidelines will be applicable for pay cycles beginning from and after April 1, 2020. The guidelines are applicable to private sector banks, including local area banks, small finance banks and payments banks. They are also applicable to foreign banks operating in a wholly owned subsidiary structure.

The central bank also said that for senior executives, including whole-time directors, and other employees who are major risk takers, deferral arrangemen­ts must invariably exist for the variable pay, regardless of the quantum of pay.

For such executives of the bank, RBI said, a minimum of 60% of the total variable pay must be under deferral arrangemen­ts.

RBI said the deferred compensati­on should be subject to clawback arrangemen­ts in case of subdued or negative financial performanc­e of the bank.

 ?? MINT ?? RBI’S guidelines are applicable to private sector banks, including local area banks, small finance banks, payments banks, and also to foreign banks operating in a wholly owned subsidiary structure.
MINT RBI’S guidelines are applicable to private sector banks, including local area banks, small finance banks, payments banks, and also to foreign banks operating in a wholly owned subsidiary structure.

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