MUMBAI: Top executives in banks will have to receive half their salary in the form of variable pay which will be linked to their bank’s performance, according to new rules announced by the RBI on Monday. The variable pay itself will be capped at 300% of the fixed pay and will include equity compensation.
The inclusion of equity in variable pay and the cap on variable pay would mean that bonuses will be limited, and will include non-cash compensation.
The new guidelines announced by the central bank on Monday will be effective from April 1, 2020. These guidelines apply to private sector banks, local area banks, small finance banks and payment banks. They will also apply to multinational banks that have incorporated locally as wholly owned subsidiaries.
Besides chief executives, the restriction on salaries will apply to senior executives, including whole-time directors, and other employees who are risk-takers such as bond traders. RBI has said that if bonuses are paid in cash, at least half of the cash bonus should be deferred if the total amount is over Rs 25 lakh.
If the variable pay is up to 200% of the fixed pay, at least 50% of it must be non-cash, and if the variable pay is above 200%, 67% of it should be paid via non-cash instruments.
In addition to deferring the bonuses, RBI has asked banks to have ‘clawback’ clauses which enable them to recover past bonuses if the executive’s actions result in losses for the bank. The policies determining compensation will have to be laid out by the board of each bank.
“The policy should cover all aspects of the compensation structure such as fixed pay, perquisites, performance bonus, guaranteed bonus (joining/sign-on bonus), severance package, share-linked instruments such as employee stock option plan (ESOPs), pension plan and gratuity taking into account these guidelines,” said RBI.
“Banks shall identify a representative set of situations in their compensation policies, which require them to invoke the clawback clauses that may be applicable on entire variable pay,” RBI said.
“The compensation practices were one of the important factors which contributed to the global financial crisis in 2008. Employees were often rewarded for increasing short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organisations,” RBI said in its note to banks announcing the new rules.
According to RBI, it was these perverse incentives that amplified excessive risk-taking that severely threatened the global financial system. “The compensation issue has, therefore, been at the centre stage of regulatory reforms,” RBI said.
Source- Times of India.