SBP de­vel­ops guide­lines on re­mu­ner­a­tion prac­tices for banks

The Pak Banker - - FRONT PAGE - Muham­mad Yasir

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.

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