Insurance honchos to face variable pay clawbacks

Factors like persistency, claims settlement, grievance redressal to play part in pay

The variable pay structures of managing directors (MDs), chief executive officers (CEOs) and whole-time directors (WTDs) of private insurers might soon have a clawback structure if the company performance in areas such as persistency, claims settlement, grievance redressal sees a decline. With Insurance Regulatory and Development Authority of India (Irdai) proposing an array of metrics to consider while deciding the salary, these top executives will face a closer scrutiny.

Presently, Irdai has not laid down any guidelines to insurers on remuneration of top officials. In effect, there are no limits imposed on the remuneration structure barring the fact that remuneration beyond Rs  1.50 crore should be debited to Shareholders’ Fund. However, when these new guidelines are finalised and implemented, more emphasis would be on all types of risks. Insurance executives said since sales are also seasonal and largely dependent on macro-economic conditions, assets under management (AUMs) might also vary.

"Since areas like networth of insurer and AUM will have to be considered, compensation structures may see fluctuations since the growth in economy and disposable income directly translate to better sales," a senior private life insurance executive said.

IRDAI vs other financial regulators

Appointments

• IRDAI approves appointment of MD/CEOs in private insurers
• Top executive appointment in banks need RBI approval
• Sebi approval not required for CEO/MD appointment in mutual funds

Compensation

• IRDAI gives nod for MD/CEO remuneration for private insurers
• RBI gives approval for remuneration for top executives in private/foreign banks
• Sebi approval is not presently required for remuneration of top executives, but it may look closely at high-paid executives in future

In its draft guidelines on compensation of CEOs/whole-time directors in private insurers, Irdai said insurers should ensure that for the MDs/ WTDs/CEOs, compensation is adjusted for all types of risk. It added that compensation outcomes should be symmetric with risk outcomes.

“A wide variety of measures of credit, market and liquidity risks may be used by the insurers in implementation of risk adjustment. The risk adjusted methods should preferably have both quantitative and judgmental elements,” said the regulator. The minimum risks, which need to be taken into account include persistency risk, solvency, grievance redressal, expenses of management, claim settlement, overall financial position such as networth and AUM of policyholders among others.

There is also a fear that micro-managing compensation of top executives would lead to retention issues. "While financial performance of the company is always considered with respect to remuneration of MD/CEO, clawing back variable pay is unheard of in the industry. They may have to balance it out with other incentives to ensure that the individuals stay committed to the company," said a Delhi-based head of an executive search firm.

Irdai has also said insurers should ensure that the fixed portion of compensation is reasonable, taking into account all relevant factors.

With respect to variable pay, it said at higher levels of responsibility the proportion of variable pay could be higher.

At present, variable pay constitutes 40-55 per cent in the companies depending on their size and the number of years they have been in business. While the quantum is performance linked, there are no major stringent norms to claw-back the pay if areas like grievance redressal see an impact.

Irdai said in case of deferral compensation, if there is a drop in the parameters specified and /or the relevant line of business in any year during the vesting period, any unvested portions would be clawed back.

However, it said due consideration might be given to the actual/realised performance of the insurer. It also asked insurers to put in place appropriate mechanism to incorporate a clawback mechanism in respect of variable pay, linked to above parameters.  Irdai has also asked insurers to not give guaranteed bonus and only joining bonus would be allowed limited to first year.  It has also asked insurers to have proper succession plan mainly for an executive.