Variable Pay of Private Sector Bank Chiefs

BE/RBINOTE/12/2019

The apex Bank Reserve Bank of India, has proposed that special rules for inclusion of heads of Private Sector Banks including foreign lenders be framed making 50% of their compensation to be paid as Variable pay.  The proposal in details reads as under:

1. 50% of the compensation of a
   1. Wholetime Director (WTD)
   2. Chief Executive Officer (CEO)
2. Should be variable and
3. Employee stock option plans (ESOPs) must be included as a component of variable pay.
4. Variable pay be capped at 200% of Fixed Pay which is at present capped at 70% of Fixed Pay and does not include ESOPs.
5. Minimum of 50% of variable pay should be in the form of non-cash components.
6. A compulsory deferral mechanism for variable pay has also been proposed.
7. Divergence in case of recognition of NPAs (Non-performing assets) would also attract a penalty.
8. Also, there will be a threshold for public disclosure.
9. The guidelines also would apply to identify material risk takers and quantitative and qualitative criteria has been set.
10. New remuneration norms are to be governed by FSB principles for sound compensation and necessary codes and standards have been invoked.

Need for the Proposal:

• Compensation of large financial institutions was one of the important matters which contributed to the global financial crisis in 2008.
• Employees were often rewarded for increasing the short-term profit without adequate recognition of risks and long-term consequences posed to the organization.
• These perverse incentives amplified excessive risk-taking which in turn threatened the global financial system.