RBI issues new guidelines over private bank CEO remuneration

Image result for RBI issues new guidelines over private bank CEO remunerationThe Reserve Bank of India (RBI) has told private banks to raise the variable portion of remuneration to at least half of the total for their chief executives and whole-time directors so that top management rewards reflect the ‘pay for performance’ principles.

The RBI has also streamlined the clawback rules for whole-time directors and material risk takers to penalise them if future financial performance falters and discourage excessive risk taking for short term gains.

“In order for incentive-based remuneration to work, the variable part of remuneration should be truly and effectively variable, and can even be reduced to zero in line with the symmetry principle,” the RBI said Monday.

It said “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.”

RBI said that at higher levels of responsibility, the proportion of variable pay be higher, with a limit of 300% of the fixed pay.

The new rules are applicable to private sector banks, including local area banks, small finance banks and payments banks from April 1, 2020.

These are revised for the first time after 2012 when the central bank had capped variable pay at 70% of the fixed pay in a year, to discourage excessive risk taking for short-term gains. RBI said compensation should be adjusted for all types of risks with compensation outcomes symmetric with risk outcomes.

The central bank has revised the rules at a time when several private banks have faltered with stress in asset quality. “The objective has also been to better align the guidelines to address misconduct risk,” it said.

For whole-time directors and material risk takers, RBI said payment of at least 60% of the total variable pay must be deferred for a minimum of three years, subject to clawback arrangements.

According to the regulator, variable pay can be in the form of share-linked instruments, or a mix of cash and share-linked instruments.

“There should be a proper balance between the cash and share-linked components in the variable pay. Only in cases where the compensation by way of share-linked instruments is not permitted by law/regulations, the entire variable pay can be in cash,” RBI said.

It said all the fixed items of compensation, including perquisites and perquisites that are reimbursable, be treated as part of fixed pay. Further, contributions toward superannuation or retirement benefits will be treated as part of fixed pay.

Private sector banks, foreign banks operating under the wholly owned subsidiary mode, and foreign banks operating in India under the branch mode are required to obtain regulatory approval for grant of remuneration to whole-time directors and CEOs.

Foreign banks operating in India under branch mode would be required to continue to submit a declaration to RBI annually from their head offices to the effect that their compensation structure in India, including that of CEOs, is in conformity with the principles laid down by the Financial Stability Board (FSB).

The compensation proposals for CEOs and other staff of foreign banks operating in India that have not adopted the FSB principles in their home country are required to implement the compensation guidelines as prescribed for private sector banks in India.

The RBI said guaranteed bonus is not consistent with sound risk management or the ‘pay for performance’ principles and should not be part of the compensation plan. Therefore, guaranteed bonus should only occur in the context of hiring new staff as joining/sign-on bonus and be limited to the first year.

[“source=economictimes”]