It's goodbye for fancy salaries in foreign banks

RBI urges those operating in India to set up remuneration panel to fix pay

In what could change the career landscape in private and foreign banks as a lucarative option, given that they lured the best banking brains with fancy paychecks, the Reserve Bank of India (RBI) has now drawn the laxman rekha on “excessive” salary their staff can get and the management can dole out.

Among bankers drawing an annual salary in excess of Rs 1 crore include ICICI Bank CEO Chanda Kochhar, Axis Bank CEO Shikha Sharma, ICICI Bank top executives directors K Ramkumar, N S Kannan, Rajiv Sabharwal.

The government fixes the remuneration for key executives of public sector banks RBI’s top officials, including the governor.

While neither succinctly specifying what constitued “excessive remuneration” nor putting a specific ceiling on it, the RBI, has, however, made it mandatory for private and foreign banks to obtain prior permission from RBI while fixing the salaries of their staff and CEOs and wholetime directors.

Stipulating the series of dos and don’ts in this regard through fresh guidelines for them to follow, the RBI has said they should strictly go as per the Banking Regulation Act, 1949, which prohibits excessive remuneration.

Incidentally, according to information available from RBI under Right to Information Act, Governor D Subbarao got a gross salary of Rs 1,28,500 in the month of June 2010. This corresponds to an annual package of little over Rs 15 lakh for RBI Governor, who is a signatory to all the currency notes in the country. In RBI’s view, these banks are required to fix reasonable compensation, taking into account all relevant factors, including the industry practice and a proper balance ensured between fixed pay and variable pay.

Variable pay, however, should not exceed 70 per cent of the fixed pay in a year, it noted.
The guidelines would be implemented from 2012-13. The approval process, RBI said, will involve an assessment whether the compensation policies and practices are in accordance with the Financial Stability Board (FSB) Principles.

The principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes. The principles call for effective governance of compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and stakeholder engagement, it said. The principles have been endorsed by the G-20 countries and the Basel Committee on Banking Supervision and are under implementation across jurisdictions, it added.

Banks, the RBI guidelines stipulated, should formulate and adopt comprehensive compensation policy covering all their employees and conduct annual review.

The guidelines directed private sector banks to constitute a remuneration committee (RC) of the Board to oversee the framing, review and implementation of compensation policy of the bank on behalf of the board.

The RC should have a minimum of three members and should include at least one member from Risk Management Committee of the Board. The majority of members of the RC should be independent non-executive directors, it said.

The RC should also ensure that the cost/income ratio of the bank supports the remuneration package consistent with maintenance of sound capital adequacy ratio, it said.

Banks are required to make disclosure on remuneration on an annual basis at the minimum, in their annual financial statements, it added.

As regards salary of foreign bank executives, the RBI guideline said it is expected that Head Offices of most of these banks would align their compensation policies in line with the FSB principles. Foreign banks operating in India will, therefore, be required to submit a declaration to Reserve Bank annually from their Head Offices to the effect that their compensation structure in India, including that of CEOs’, is in conformity with the FSB principles and standards, it said.

RBI would take this into account while according approval of CEOs’ compensation, it said, adding, the compensation proposals for CEOs and other staff of foreign banks operating in India which have not adopted the FSB principles in their home country are required to implement the compensation guidelines as prescribed for private sector banks in India.