RBI to issue norms on bank execs’ salary

The Reserve Bank of India moving in line with other regulators in the West, will be issuing guidelines to standardize the pay of senior executives of private and foreign banks, as in the West some banks have come under attack for offering generous compensation packages to staffers.

After the financial crisis the compensation packages given to the staffers are being scrutinized closely, especially in the West. The RBI has pointed out that the principles of Financial Stability Board (FSB), a global supervisory body comprising senior representatives of national financial authorities, which have been approved by G-20, should be used as guiding principles for working out the compensation schemes for all employees in a financial institution.

The senior bank official informed that RBI will soon issue broad norms on compensation policies and might not limit pay. But there are chances that bonus payments might be delayed. For instance, recently in case of ING Vysya Bank, RBI did not approve the pay package of Gautam Vir, former CEO of Development Credit Bank therefore Mr Vir did not join ING Vysya Bank.

At present there are no formal guidelines for salary packages for private banks. Now before giving its approval for the packages of bank CEOs, RBI looks at the profitability of banks, key financial ratios and reputation. According to the Banking Regulation Act, any compensation to directors must be approved by the central bank. In August 2003 the regulator had issued specific guidelines for bonuses of private sector bank CEOs. According to the RBI circular, the annual bonus can either be a maximum of 25% of the salary or the average bonus paid to employees, provided there is more than a single category of employees, excluding the top management, who are eligible for variable performance bonus.

R Suresh, managing director, Stanton Chase, stated that RBI always had guidelines on compensation but it did not provide any easy or fraudulent means for senior professionals to show high short-term profits. Among the important parameters RBI can take measures are long-term performance and performance linked to a broader set of criteria.

On the other hand banking sources pointed out there are no specific guidelines on salaries and bonuses of foreign bank CEOs, but these have to be approved by RBI. However the bonus pool of foreign bank CEOs is based on a host of factors, including profitability of the franchise, compliance and control, relationships with key regulators, contributions to the franchise, etc. Also the bonuses of some foreign bank CEOs are 2-3 times their base salaries which in recent times have been delayed.

While among the CEOs of private banks, Romesh Sobti of IndusInd Bank is withdrawing a salary of Rs 2.44 crore, Shikha Sharma of Axis Bank (Rs 2.21 crore), Chanda Kochhar, ICICI Bank (Rs 1.96 crore) and Aditya Puri, HDFC Bank (Rs 1.74 crore). In contrast to this the pay packages of CEOs of public sector banks are much lower at Rs 12 lakh.

Mark Robinson, CEO, South Asia, Citibank said, “The policy is not explicit... it is more of a principle of what it should be. Maybe it is hinting at a compensation aligned with the risk and return as practiced in developed markets, which makes perfect sense. But there are no specifics mentioned in the policy and so we are awaiting further clarity from the RBI.”

As per the norms recommended by FSB, a considerable portion of compensation of senior executives, whose actions have a material impact on the risk exposure of the firm, should be variable.

It also suggested that a significant portion of this variable compensation must be paid on deferral arrangement.