Variable Portion of Private Bank CEO’s Remuneration

BE/RBINOTE/52/2019

• All the Private Sector Banks, which includes local area banks, Small finance Banks and Payments Banks have been effective from 1^st April 2020, advised by Reserve Bank of India, to raise the variable portion of the remuneration of their Chief Executive Officers, atleast by half of their total pay which includes the Whole time directors too.  This is done with a view to reflect the PAY FOR PERFORMANCE principles.
• Also RBI has streamlined the clawback rules for whole time directors as also material risk takers with a view to penalize them if there is failure in the future financial performance and also to curb excessive risk taking for short term financial gains.
• The variable portion of pay has been advised to be increased in order to have a true and effective variable pay structure, which can otherwise also can be zeroised with the symmetry principle. A substantial portion of compensation ie., 50 percent should be variable which should be based on Individuals, business units and firm wide measures that adequately measures performance.
• With a limit of 300 per cent of fixed pay at higher levels of responsibility the proportion of variable pay should be higher as per RBI statement.
• It may be noted that these are being revised for the first time after 2012 when RBI had capped the variable pay at 70 per cent of the fixed pay in a year which was done with a view to discourage excessive risk taking for short term gains.
• RBI also stated that compensation should be adjusted for all types of risks with compensation outcomes symmetric with risk outcomes.
• Variable pay can be in the form of share linked instruments or a mix of cash and share linked instruments.
• All fixed items of compensation including perquisites and perquisites that are reimbursable should be treated as part of Fixed Pay.
• Also contributions towards superannuation or retirement benefits should be treated as part of fixed pay.
• Banks should be obtain regulatory approval for grant of remuneration to wholetime directors and CEOs.
• Also RBI added that guaranteed bonus is not consistent with sound risk management or the PAY FOR PERFORMANCE principles and should not be part of compensation plan. Guaranteed bonus should only occur in the context of hiring new staff as joining/sign on bonus and be limited to the first year.