The Reserve Bank of India (RBI) on Monday said at least half the compensation offered to chief executive officers (CEOs) and whole-time directors in private banks should be variable pay linked to the performance of the individual, the business unit and the bank.
“At higher levels of responsibility, the proportion of variable pay should be higher. The total variable pay shall be limited to a maximum of 300 per cent of the fixed pay for the relative performance-measurement period,” said the central bank in a circular issued on Monday, in its bid to link performance of the banks with the CEO compensations, which also brings in the senior decision making staff.
The guidelines, which also cover local-area banks, small finance banks, payments banks and foreign banks, have done away with guaranteed bonuses.
The RBI said guaranteed bonus was not consistent with sound risk management or the “pay for performance” principles, and should not be part of the compensation plan.
Guaranteed bonuses will only be for new staff and would be limited to the first year.
The guidelines issued by the central bank are in line with the discussion paper on the subject released on February 25, when it said that a major share of the compensation will be in variable pay.
For whole-time directors and material risk takers (MRTs), the central bank said a minimum of 60 per cent of the total variable pay must invariably be under deferral arrangements. And if the cash component is part of the variable pay, at least 50 per cent of the cash bonus should also be deferred. In cases where the cash component of the variable pay is under Rs 25 lakh, deferral requirements would not be necessary.
The deferral period is to be for minimum of three years and applicable to both the cash and non-cash components of the variable pay. The deferred compensation should also have “malus or clawback arrangements in case of subdued or negative financial performance of the bank”.
On the specific aspect of divergence in bad loans, it said 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. The RBI’s April 1, 2019 circular (on the 'Disclosure in the Notes to Accounts to the Financial Statements: Divergence in the asset classification and provisioning) had mentioned that banks should disclose divergences, if either or both of the following conditions are satisfied: the additional provisioning for NPAs assessed by RBI exceeds 10 per cent of the reported profit before provisions and contingencies for the reference period, and the additional gross NPAs exceeds 15 per cent of the published incremental gross NPAs for the reference period.
It might be recalled that the RBI has been particularly concerned over the variance in the treatment of NPAs across banks in recent times.