RBI issues new compensation guidelines for private, foreign bank CEOs
The RBI directed that there should be proper balance between the cash and share- linked components in the variable pay.
The Reserve Bank of India has issued new compensation guidelines for the private, foreign, small finance, local area and payment banks to raise the variable portion of the remuneration to at least half of the total for their CEOs and full-time Directors.
The new compensation guidelines were issued on November 4, 2019. The RBI stated that if the variable pay is up to 200 percent of the fixed pay, at least 50 percent of it should be non-cash. However, if the variable pay is more than 200 percent of fixed pay then, 67 percent of it should be paid through non-cash ways.
The RBI issued the new compensation guidelines so that the top management rewards reflect the 'pay for performance' principles. The new guidelines will come into effective from April 2020.
RBI Guidelines: Important Points
Banks should continue to form and adopt a comprehensive compensation policy, which will cover all their employees and conduct annual reviews.
The new compensation policy should include components such as fixed pay, variable pay, performance bonus, guaranteed bonuses, gratuity, perquisites, severance package and share-linked instruments such as employee stock option plans and pension plans.
Banks should retrieve the non-variable pay components if there is a divergence in provisioning for NPAs or when asset classification exceeds the prescribed threshold for public disclosure.
Foreign banks operating under branch mode will be required to submit a declaration to the RBI annually from their head offices, which will confirm that the compensation structure of those working in the country are in line with the principles and standards set by the Financial Stability Board.
The compensation proposals for foreign banks CEOs, which have not yet adopted the FSB principles in their home nation, will have to implement the compensation guidelines for the private sector banks here.
The foreign banks operating as wholly-owned subsidiaries will be required to follow the compensation guidelines prescribed for private sector banks.
The board of directors of banks should comprise a 'nomination and remuneration committee' to oversee the framing, review and implementation of the compensation policy.
The RBI directs banks to ensure that their CEOs/full-time Directors get compensation adjusted for all types of compensation outcomes and risks, which are in sync with the risk outcomes.
The RBI directed that a substantial proportion of the compensation, at least 50 percent, should be variable and should be paid based on individual, business-unit and firm-wide measures that adequately measure performance.
The proportion of the variable pay will be higher at a higher level of responsibility, with a limit of 300 percent of the fixed pay.
The banks should also ensure that the compensation’s fixed portion is reasonable, taking into account relevant factors, including adherence to statutory requirements and industry practices.
The variable pay can be in the form of share-linked instruments or it can include both non-cash instruments and cash. The RBI directed that there should be a proper balance between the cash and share- linked components in the variable pay.
The RBI stated that only in cases where the compensation by way of share-linked instruments is not permitted by the law or regulations, the entire variable pay can be in cash. The RBI also directed that there should be a proper balance between the fixed pay and variable pay as well.
The fixed pay will include all fixed items of compensation, including perquisites and perquisites that are reimbursable and contributions toward superannuation or retirement benefits.
The payment of at least 60 percent of the total variable pay should be deferred for a minimum of three years for the material risk takers and full-time Directors/CEOs.
The deferred remuneration should either vest fully at the end of the deferral period or be spread out throughout the deferral period.
The deferred compensation to the CEOs/ full-time Directors should be subject to the claw-back arrangements in case of subdued or negative financial performance in the given year.
Guaranteed bonuses should not be a part of the compensation plan, as it is not consistent with sound risk management or the ‘pay for performance’ principles. It should only occur in the context of hiring new staff as joining/sign-on bonus and be limited to the first year.
The RBI has revised the compensation rules at a time when several private banks have been dealing with financial stress in asset quality. The key objective behind the move has been to better align the guidelines to address the risk of misconduct.
The RBI has revised the compensation guidelines for the private and foreign banks for the first time since 2012.
In 2012, RBI had capped variable pay at 70 percent of the fixed pay in a year, to discourage excessive risk-taking for short-term gains.
The RBI has now said that the compensation for CEOs and full-time Directors should be adjusted for all types of risks with compensation outcomes symmetric with risk outcomes.