The RBI has proposed a revamp in CEO salaries, requiring at least half of bankers' compensation to come under variable pay with the institution having the right to recover past bonuses if the lender has a high level of bad loans or hides bad debts. The move comes close on the heels of the central bank cracking down on CEOs of private banks for divergence between bad loans disclosed by the lenders and what emerged during the RBI's inspection. Last week, the bank said compensation practices, especially of large financial institutions were one of the important factors that contributed to the global financial crisis in 2008.
The circular said, “Employees were too often rewarded for increasing the short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organisations. These preserve incentives amplified the excessive risk-taking that severely threatened the global financial system. The compensation issue has, therefore, been at the centre stage of regulatory reforms.”
The proposed norms will apply to whole-time directors, chief executives and 'material risk-takers'. It will also apply to staff with control functions. Some of the main changes proposed by the RBI include requiring a large part of the compensation to be in the form of variable play, which is a term used for performance-linked salaries or bonuses. Another key change is that the variable pay has to be capped at 200% of fixed pay as against 70% earlier (when stock option was not included). The proposed rules also require that 50% of the variable pay be distributed as a non-cash component.
