RBI tightens pay norms for poorly performing private bank CEOs

The Reserve Bank of India (RBI) on Monday issued revises guidelines on compensation for chief executives (CEOs) and whole-time directors (WTDs) and material risk takers (MRTs) of private banks and foreign banks. The new rules, which will be effective from April 1, 2020, proposes that in case of deterioration in the financial performance of the bank, there should be a contraction in the total amount of variable compensation, which can even be reduced to zero.

As per the RBI guidelines, all the fixed items of compensation such as perquisites, performance bonus, guaranteed bonus (like joining or sign-on bonus), severance package, share-linked instruments, including Employee Stock Option Plan (ESOPs), pension plan, gratuity, etc., will be treated as part of fixed pay.

The apex bank said that there has to be a proper balance between fixed pay and variable pay. According to RBI, variable pay for the CEOs, WTDs and MRTs may be in the form of share-linked instruments, or a mix of cash and share-linked instruments. At least 50 per cent of pay should be variable and paid on the basis of individual, business-unit and firm-wide measures that adequately measure performance, it said.

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"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 per cent of the fixed pay (for the relative performance measurement period)," RBI added.

"In case variable pay is up to 200 per cent of the fixed pay, a minimum of 50 per cent of the variable pay; and in case variable pay is above 200 per cent, a minimum of 67 per cent of the variable pay should be via non-cash instruments," the apex bank said.

In the event that an executive is barred by statute or regulation from grant of share-linked instruments, her variable pay will be capped at 150 per cent of the fixed pay, but shall not be less than 50 per cent of the fixed pay, it added.

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For senior executives, including WTDs, and other employees who are MRTs, a minimum of 60 per cent of the total variable pay must invariably be under deferral arrangements. Further, if cash component is part of variable pay, at least 50 per cent of the cash bonus should also be deferred. However, in cases where the cash component of variable pay is under Rs 25 lakh, deferral requirements would not be necessary. The deferral period should be a minimum of three years. This would be applicable to both cash and non-cash components of variable pay.

Banks are required to make disclosure on remuneration of CEOs, WTDs and MRTs on an annual basis at the minimum, in their annual financial statements, as per the new guidelines.

On bonus, the RBI said that guaranteed bonus is not consistent with sound risk management or '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.

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"Further, joining/sign-on bonus should be in the form of share-linked instruments only, since upfront payments in cash would create perverse incentives. Such bonus will neither be considered part of fixed pay nor part of variable pay."

Further, banks should not grant severance pay other than accrued benefits (gratuity, pension, etc.) except in cases where it is mandatory under any statute, it added.

On hedging, the apex bank said that the lender sall not permit employees to insure or hedge their compensation structure to offset the risk alignment effects embedded in their compensation arrangement. To enforce the same, banks should establish appropriate compliance arrangements, RBI says.

Edited by Chitranjan Kumar