RBI issues norms for compensation key managerial staff at NBFCs

Finance companies need to set up nomination and remuneration committee, which will oversee the framing, review and implementation of compensation policy with board approval

The Reserve Bank of India (RBI) on Friday issued guidelines for compensation of key managerial personnel and senior management of non-banking finance companies, wherein it has said that the finance companies have to constitute a nomination and remuneration committee (NRC), which will have the mandate to oversee the framing, review and implementation of compensation policy of the company with the approval of the board.

Further, the NRC will also have to work with the risk management committee of the company to achieve effective alignment between compensation and risks.

“NRC may ensure that compensation levels are supported by the need to retain earnings of the company and the need to maintain adequate capital based on Internal Capital Adequacy Assessment Process (ICAAP). NRC may also ensure ‘fit and proper’ status of proposed/existing directors and that there is no conflict of interest in appointment of directors on Board of the company, KMPs and senior management”, RBI said.

These guidelines will come into effect from April 1, 2023 and will be effective on all the finance companies, apart from the ones in the base layer. These guidelines are as per the scale-based regulation for NBFCs introduced by RBI in October last year.

As per the guidelines, the compensation packages will comprise of fixed and variable pay components aligned effectively with prudent risk taking to ensure that compensation is adjusted for all types of risks. Further, the compensation outcomes should be symmetric with risk outcomes and compensation pay-outs have to be sensitive to the time horizon of the risks.

RBI has said that all the fixed items of compensation, including the perquisites and contributions towards superannuation/retiral benefits, may be treated as part of fixed pay.

And, the proportion of variable pay in the total compensation of the management of NBFCs should be commensurate with their role and prudent risk-taking profile and at higher levels of responsibility, the proportion of variable pay should be higher. Variable pay can even be reduced to zero based on performance at an individual, business unit and company wide level.

Also, the board of NBFCs may not offer guaranteed bonuses to the senior management and key managerial personnel. "However, in the context of new hiring, joining/sign-on bonus could be considered. Such bonus will neither be considered part of fixed pay nor of variable pay.