Money & Banking

RBI revises compensation guidelines for private bank CEOs, whole-time directors

Our Bureau Mumbai | Updated on November 04, 2019



The Reserve Bank of India, on Monday, told private sector banks and foreign banks operating in India that the compensation of whole-time directors, chief executive officers, and material risk takers should include deferral arrangement in the variable pay.

Malus arrangement

The deferred compensation should subject to malus/ clawback arrangements in the event of subdued or negative financial performance of the bank. This direction is part of the regulator’s effort to reduce incentives towards excessive risk-taking that may arise from the structure of compensation schemes.

A malus arrangement permits the bank to prevent vesting of all or part of the amount of a deferred remuneration. Malus arrangement does not reverse vesting after it has already occurred. A clawback, on the other hand, is a contractual agreement between the employee and the bank in which the employee agrees to return previously paid or vested remuneration to the bank under certain circumstances.

In its guidelines on compensation of WTD/ CEOs/ MRTs and control function staff, the RBI said the fixed portion of their compensation has to be reasonable and that there should be proper balance between the cash a share-linked components in the variable pay.

The guidelines are aimed at reducing incentives towards excessive risk-taking that may arise from the structure of compensation schemes. As per the guidelines, all the fixed items of compensation, including the perquisites, will be treated as part of fixed pay. Further, all perquisites that are reimbursable, should also be included in the fixed pay so long as there are monetary ceilings on these reimbursements.

Contributions towards superannuation/retiral benefits will be treated as part of fixed pay. The variable pay can be in the form of share-linked instruments, or a mix of cash and share-linked instruments. Only in cases where the compensation by way of share-linked instruments is not permitted by law/regulations, the entire variable pay can be in cash.

For senior executives, including whole-time directors (WTDs), and other employees who are material risk takers (MRTs), deferral arrangements must invariably exist for the variable pay, regardless of the quantum of pay, the RBI said. The deferral period should be a minimum of three years. This would be applicable to both the cash and non-cash components of the variable pay.

Wherever the assessed divergence in bank’s provisioning for non-performing assets (NPAs) or asset classification exceeds the prescribed threshold for public disclosure, the bank shall not pay the unvested portion of the variable compensation for the assessment year under ‘malus’ clause.

Further, in such situations, no proposal for increase in variable pay (for the assessment year) shall be entertained. In case the bank’s post assessment Gross NPAs are less than 2 per cent, these restrictions will apply only if the criteria for public disclosure are triggered either on account of divergence in provisioning or both provisioning and asset classification.

Disclosure on remuneration

Banks are required to make disclosure on remuneration of WTDs/CEOs/MRTs on an annual basis at the minimum, in their annual financial statements. These guidelines will be applicable to private sector banks (including local area banks, small finance banks and payment banks) and foreign banks operating in India for pay cycles beginning from/after April 1, 2020.

Published on November 04, 2019

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