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:
- 50% of the compensation of a
- Wholetime Director (WTD)
- Chief Executive Officer (CEO)
- Should be variable and
- Employee stock option plans (ESOPs) must be included as a component of variable pay.
- Variable pay be capped at 200% of Fixed Pay which is at present capped at 70% of Fixed Pay and does not include ESOPs.
- Minimum of 50% of variable pay should be in the form of non-cash components.
- A compulsory deferral mechanism for variable pay has also been proposed.
- Divergence in case of recognition of NPAs (Non-performing assets) would also attract a penalty.
- Also, there will be a threshold for public disclosure.
- The guidelines also would apply to identify material risk takers and quantitative and qualitative criteria has been set.
- 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.