The chief executive officers (CEOs) and wholetime directors of private sector banks will now not only have a cap on the annual hike on their fixed salary component but may also see a cut in their variable component in case their performance lags.
The Reserve Bank of India on Friday came out with a draft guideline on compensation of CEO’s and wholetime directors of the private banks that proposes to cap the annual salary increase in the fixed component between to 10 and 15 per cent.
“In case of wholetime directors and CEOs, the annual increase in fixed pay should not generally be more than in the range of 10-15 per cent,” the draft said. “Deterioration in the financial performance should generally lead to a contraction in the total amount of variable remuneration paid.”
According to the draft, the banks will have to maintain a proper balance between fixed pay and variable pay and also 40-60 per cent of the variable pay must be deferred for a minimum period of three years.
RBI has also maintained in the draft that guaranteed bonuses should not be a part of compensation plan and should only be given in the context of hiring new staff and should be limited to the first year. However, this payment should be in the form of employee stock option (ESOPs) only, since advance payments would create ‘perverse’ incentives and promote undue risk taking.
“Guaranteed bonuses are not consistent with sound risk managements or the pay-for performance principles and should not be part of compensation plan,” it said.
RBI has also said that foreign banks will have to submit an annual declaration from their head offices stating that their compensation structure in India, including that of the CEO, is in line with the principles and standards of Financial Stability Board (FSB).
In case, the Reserve Bank finds that compensation is not properly aligned to risks or there are other lacunae, the issue would be taken up with the home-country regulator.