RBI Proposes Tightening Compensation Norms For Private Sector Bank Executives To Prevent Excessive Risky Activities

Reserve Bank of India (RBI) has proposed tightening compensation norms for executives of private sector banks, including foreign ones to prevent excessive risky activities.

The discussion paper aims to tighten guidelines for compensation of whole time directors, chief executive officers, material risk takers and control function staff etc. In January 2012, the central bank had issued compensation guidelines for implementation by the private sector and foreign banks from the financial year 2012-13.

However, they were not in line with the stringent Principles and Implementation Standards brought out by the Financial Stability Board (FSB) in 2009 which intended to “to reduce incentives towards excessive risk-taking that may arise from the structure of compensation schemes.

Thus, the proposal aims to bridge the gap between the circular and FSB’s recommendations. While earlier no threshold was prescribed, the new guidelines propose to make at least 50 per cent of executive pay variable.

“ESOPs to be included as a component of Variable Pay. (Earlier excluded). Variable Pay is to be capped at 200 per cent of Fixed Pay (Earlier Variable Pay was capped at 70 per cent of Fixed Pay but did not include ESOPs). Minimum 50 per cent of Variable Pay is to be via non-cash component. (Earlier no specific proportion was prescribed),” said an RBI release.

Interested parties can provide inputs in the Guidelines until 31 March 2019.

Perform And Get Paid

It was reported in January (2019) that RBI was considering a proposal to tie the remuneration of bank CEOs to metrics like bank’s balance sheet size, loan delinquency, profits and governance record.

This proposal, if approved, will provide directors with broad guidelines to decide on the salaries, performance bonuses and stock options of the senior executives.

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