The gap in the remuneration between top executives and average employees is the widest in the case of Small Finance Banks (SFBs), according to RBI.

In the case of SFBs, the MD & CEO’s’ remuneration was 58.1 times the average employee pay in 2022, per RBI’s “Report on Trend and Progress of Banking in India 2022-23”.

In the case of private sector banks (PVBs) and public sector banks (PSBs), the MD & CEOs’ remuneration was 26.1 times and 2.4 times, respectively, the average employee pay in 2022.

“The disparity in remuneration between top executives and average employees may induce risk-taking behaviour and can be detrimental to the long-term objectives of the institution. In the context of Indian banks, the gap is the widest in the case of SFBs,” RBI said.

The central bank cautioned that linking the variable component of management compensation to annual performance indicators may inadvertently shift focus to short-term gains at the expense of long-term stability.

In order to maintain a balance between such myopia and an incentive-based compensation structure, the Reserve Bank’s revised guidelines require that at least 50 per cent of the total compensation should be variable.

The share of variable pay (VP) in total remuneration (TR) for PVBs increased from 31 per cent at end-March 2021 to 39 per cent at end March 202213. For SFBs, it increased marginally from 25 per cent to 26 per cent during the same period.

At end-March 2022, the share of non-cash components in the VP for PVBs and SFBs decreased to 57 per cent and 34 per cent, from 78 per cent and 41 per cent in the previous year, respectively, RBI said.