- India's banking regulator issued revised guidelines on compensation for CEOs, Whole-time directors, and other important staff members of private banks.
- The new guidelines may also affect the remuneration of chiefs of foreign banks present in India.
- The new guidelines from the Reserve Bank of India will be effective from April 1, 2020.
These are some of the important outlines drawn out by the RBI:
The policy should cover all aspects of the compensation structure such as fixed pay, perquisites, performance bonus, guaranteed bonus (joining/sign-on bonus), severance package, share-linked instruments e.g. Employee Stock Option Plan (ESOPs), pension plan, gratuity, etc.
At least 50%, should be variable and paid on the basis of individual, business-unit and firm-wide measures that adequately measure performance. At higher levels of responsibility, the proportion of variable pay should be higher. The total variable pay shall be limited to a maximum of 300% of the fixed pay for any given period. There are exceptions to this.
In case variable pay is up to 200% of the fixed pay, a minimum of 50% of the variable pay; and in case variable pay is above 200%, a minimum of 67% of the variable pay should be via non-cash instruments.
In the event that an executive is barred by statute or regulation from grant of share- linked instruments, his/her variable pay will be capped at 150% of the fixed pay, but shall not be less than 50% of the fixed pay
If a bank performs badly, the variable pay should be reduced.
A minimum of 60% of the total variable pay must invariably be under deferral arrangements, minimum 3 years. At least 50% of the cash bonus, if it is more than ₹25 lakh, should also be deferred. The deferred remuneration should starting vesting with executive only at the end of the first year, on a pro rata basis.
If the bank has under-reported bad loans, beyond the limit set by the RBI, the bank shall not pay the unvested portion of the variable compensation for the assessment year. Further, no proposal for increase in variable pay (for the assessment year) shall be entertained.
Banks are allowed to 'guarantee' only a joining bonus at the time of hiring. This would not be part of the fixed pay or the variable part. Severance pay will include only accrued benefits except in cases where a statute mandates it.
Risk control and compliance staff have been kept out of the new guidelines mandating a minimum amount of variable pay.
Private sector and foreign banks operating in India are required to obtain regulatory approval for grant of remuneration.
The compensation for material risk takers— people whose decisions affect the risk— in any bank should be paid as much as the top 0.3% of the bank's staff, or at least as much as the lowest paid person in the senior management.
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