Banks can't pay excessive salary to CEOs: RBI

The Reserve Bank of India (RBI) today said CEOs and staff of private and foreign banks cannot draw "excessive" salary, but it did not impose any cap on their remuneration.

Issuing guidelines on compensation of CEOs and staff of private and foreign banks, RBI said all private and foreign lender will have to obtain prior approval from it for renumeration of CEOs and whole time directors as per the Banking Regulation Act, 1949 which prohibits excessive renumeration.

However, the guideline did not specify what would constitute excessive renumeration.

Banks are required to ensure that the fixed portion of compensation is reasonable, taking into account all relevant factors, including the industry practice, it said.

While designing the compensation arrangements it should be ensured that there is a proper balance between fixed pay and variable pay, it said. Variable pay, however, should not exceed 70% of the fixed pay in a year.

The guidelines would be implemented from 2012-13.

"As hitherto, private sector and foreign banks operating in India would be required to obtain regulatory approval for grant of remuneration to whole time directors or chief executive officers in terms of Section 35B of the Banking Regulation Act, 1949," the RBI said in a notification.

"The approval process will involve an assessment whether the compensation policies and practices are in accordance with the Financial Stability Board [FSB] Principles," it said.

The principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes. The principles call for effective governance of compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and stakeholder engagement, it said.

The principles have been endorsed by the G-20 countries and the Basel Committee on Banking Supervision and are under implementation across jurisdictions, it added.