SBP develops guidelines on remuneration practices for banks
State Bank of Pakistan has developed 'Guidelines on Remuneration Practices' and minimum benchmarks for 'Additional Disclosures on Governance and Remuneration' to make the board and senior management of banks / DFIs more accountable and responsible, aligning their compensation with risk adjusted performance.
The objective of these guidelines is to provide guidance to banks and DFIs to develop fair, transparent and sound compensation policy that is aligned with risks and responsibilities of Financial Intermediation.
According to guidelines, the banks should prepare a comprehensive, transparent and fair remuneration policy and remuneration setting mechanism in accordance with the guidelines and shall report the compliance of the same to the SBP. For this purpose, the banks shall submit their remuneration policy, duly approved by their Board, to SBP for information, within 15 days of the deadline. These guidelines intend to make directors and senior management more accountable for their governance and performance vis-àvis determination and payment of compensation. The compensation policy needs to be objective and transparent.
The guidelines on remuneration are applica- ble to all Banks and are to be applied to members of the Board, Key executives and other senior level employees of the institution. However, keeping in view the complexities and level of risks, an institution may appropriately apply similar principles to its employees, other than key/senior executives, Material Risk Takers (MRTs) and Risk Control Functions (RCFs), by formally identifying such employees or class of employees and explaining the rationale of such measures in the remuneration policy. Development Finance Institutions (DFIs) may appropriately comply with the requirements of these guidelines in accordance with their size, nature of business and complexities of operations.
These guidelines are not applicable to those foreign banks which are operating in Pakistan in branch mode. It must also be ensured that 'Profit Maximization' should not be the only benchmark for determination of salaries and bonuses of the employees. Rather, remuneration policy should give significant importance to the quantum of risks taken to generate profits.
Guidelines stated that the remuneration of all senior management officials and MRTs (Material Risk Takers) should be dependent upon the achievement of performance based on risk and reward matrix and qualitative factors such as legal and regulatory compliance and organizational discipline etc. The performance on qualitative factors may override the achievements of quantitative factors. The compensation to be awarded to all Senior Executives including CEO and MRTs, should be composed of variable and fixed components. The mix of cash, equity and other forms of compensation must be consistent with risk alignment. The mix may vary depending on the employee's position and role. The remuneration policy should explain the rationale for the mix recommended for each position.
As a part of remuneration mechanism, an appropriate proportion of the amount of variable pay of CEO, Key executives, any other senior officials and MRTs, would need to be withheld / deferred. For this purpose, the remuneration policy should provide for the basis of calculation of deferred pay and deferment period. For CEO, Key Executives and senior level MRTs, it is recommended that the payout period for deferred compensation may not be less than three calendar years. The remuneration policy should clearly identify major types of risks and how these risks are taken into account for determination of risk adjusted compensation. The compensation mechanism should discourage MRTs from taking excessive risks to gain short term profits resulting in their bonuses or performance awards. In order to control undue risk-taking, the compensations should be adjusted for all types of risks. The compensation policy should be aligned with long term and short term business objectives of the institution. Fixed and guaranteed bonuses are not consistent with the pay for performance and alignment of risks with compensation, hence these types of bonuses should not be allowed under the remuneration policy.