RBI tightens pay norms for private bank CEOS
NEW RULES 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 wholetime directors, chief executive officers, material risk takers and c ontrol f unction s t af f released on Monday.
“It should be ensured that there is a proper balance between fixed pay and variable pay. In accordance with FSB Implementation Standards, a substantial proportion of compensation i . e., at l east 50%, should be variable and paid on the basis of individual, business-unit and firm-wide meas
NEW GUIDELINES WILL BE APPLICABLE FOR PAY CYCLES BEGINNING FROM APRIL 1, 2020
ures 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 non-cash 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 t hat f or senior executives, including whole-time directors, and other employees who are major risk t akers, deferral arrangements must invariably e xi s t f or t he vari abl e 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.
“Banks are required to put in place appropriate modalities to incorporate malus/clawback mechanism in respect of variable pay, taking into account Supplementary Guidance issued by FSB in March 2018 on use of compensation tools to address misconduct risk, and all relevant statutory and regulatory stipulations, as applicable,” said RBI.