RBI working on strict, clear-cut clawback triggers for bank CEO pay

Linkage with RBI's compliance and inspection reports to be strengthened

The Reserve Bank of India (RBI) is crafting a comprehensive compensation package policy for the chief executive officers (CEOs) of private banks, which will reduce “the scope for interpretation” on remuneration, and lead to a significantly higher price being paid by them by way of clawback of stock options and bonuses on non-compliance with the regulatory.

The policy will place greater emphasis on the findings of Mint Road’s annual financial inspection reports and risk-based supervision — the offsite surveillance system — of private banks. 

Emphasis is expected to be put on compliance by these entities and subsidiaries with the other two regulators — the Securities and Exchange Board of India, and the Insurance Regulatory Authority of India — as well. 

Two specific aspects of CEOs’ contract — the extent of variable pay and the possibility of including stock options in the same — will be up for review, even as well-defined terms of clawback are set to be written in. What is sought by way of outcome is to make the linkage between governance and compensation. The RBI has been particularly concerned over the variance in the treatment of non-performing assets across banks in recent times. While its asset quality review did take care of these worries, it is felt that deterrence, which draws in CEOs, also needs to be incorporated. 

More so, as few CEOs had to face a substantial reduction in bonuses and stock options, even though the performance of the banks helmed was not stellar.

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When Mint Road last came up with revised guidelines for compensation at private and foreign banks on January 13, 2013, explicit reference was made to malus and clawback arrangements, but it did not detail as to when triggers for the same were to kick in. Neither was the said circular categorical, and read: “Banks may put in place appropriate modalities to incorporate malus/clawback mechanism in respect of variable pay, taking into account relevant statutory and regulatory stipulations as applicable”. 

To the extent these norms are not hard-coded as yet, banks’ boards or their remuneration committees have the leeway to interpret the same. There is lack of uniformity on other related points too.

The RBI had said that “the employee stock option plan may be excluded from the components of variable pay, even as it added that the deterioration in the financial performance of the bank should generally lead to a contraction in the total amount of variable remuneration paid. And in cases wherein variable pay constitutes a substantial portion of the fixed pay, say 50 per cent or more, an appropriate portion of it, say 40 per cent to 60 per cent, must be deferred for over a period; that banks may define what is ‘substantial’ in their compensation policy”. 

The new policy is set make these terms more definitive, which comes even as Mint Road is to come out with guidelines on banks and their subsidiaries.

TIGHTENING PURSE STRINGS

• Clear-cut clawback terms for stock options and bonuses on cards
• Non-compliance with the regulatory to set off clawback triggers
• ESOPs may be made part of variable pay
• Uniformity to set in as to how private banks tabulate CEO pay
• Room to interpret set to narrow significantly