Mumbai: In an attempt to prevent banks from offering bloated compensation packages that may tempt senior executives to take short-term risks and lead to a Lehman-like financial crisis, the Reserve Bank of India (RBI) on Friday forbade domestic private sector and foreign banks from paying guaranteed bonuses to whole-time directors and chief executive officers (CEOs), besides seeking to restrict variable pay to 70% of fixed pay in a year, even as it stopped short of recommending a cap on annual salary increases.
In a late Friday notification, RBI said banks must put in place a compensation policy for all employees through a remuneration committee to oversee the framing, review and implementation of the policy.
The banks have to frame the policy by March; it will be implemented in fiscal 2013.
"Guaranteed bonuses are not consistent with sound risk management or the pay-for- performance principles and should not be a part of the compensation plan," RBI said in the notification.
The committee should have a minimum of three members, one of whom should be from the risk-management committee of the board. A majority of the members should be independent non-executive directors.
The guidelines come more than two years after RBI signalled its desire to set guidelines for salaries of private and foreign bank executives in its second quarter policy review in October 2009. In December 2009, RBI sought information from banks on how they decided the salaries and bonuses of people heading the treasury department-a key division responsible for generating a significant portion of a bank's profits.
The draft guidelines were issued in July 2010, which among other things proposed that increases in the fixed compensation of directors and CEOs of private and foreign banks operating in India be capped in the range of 10-15% a year. This clause, however, has not been included in the final guidelines.
The norms had been expected to be implemented this fiscal year, but RBI delayed the move in February 2011, to give banks sufficient time to frame policies.
The final guidelines released on Friday have also excluded employee stock options from variable pay.
"The deterioration in financial performance of the bank should generally lead to a contraction in the total amount of variable remuneration paid," RBI said. "In case of deferral arrangements of variable pay, the deferral period should not be less than three years."
Compensation paid to bankers, particularly in the West, has invited public ire and legislative scrutiny following reports that senior bank executives, widely held responsible for the global financial crisis, continued to earn millions of dollars in salaries and bonuses amid economic turmoil that followed the September 2008 collapse of Wall Street investment bank Lehman Brothers Holdings Inc.
In India, compensation for senior private and foreign banking executives is approved by RBI on a case-by-case basis. CEOs of public sector banks earn much less and their salaries are set by the government.