RBI ISSUES GUIDELINES

ON COMPENSATION
EXECUTIVE REMUNERATION PERSPECTIVE

ABHASH

ABHINAV

AISHWARYA

SHULIN

Political Factors
Foreign banks under RBIs control
IMPACT: Interlinked banking system
collapses if the risk due to this gap in
regulation is not addressed

Economic Factors
Financial Crisis of 2008-2012
Eurozone double dip recession
IMPACT: Reduce focus on short-term
profits and link compensation with the long
term implications of executive decisions

Social Factors
Increased transparency to regulators
IMPACT: create more confidence among
investors

Cultural Factors
Banking Law (Amendments) Act 2012
In favor of Private Sector Banks
IMPACT: RBI needs to take action to
protect the interests of prefernce
shareholders

Legal Factors
Introduction of the guidelines
IMPACT: Compliance is MANDATORY for
Private Sector Banks

BASEL III Guidelines

Based on this, risk is countered by
maintaining adequate capital. So, any
unnecessary risks taken by executives is
countered by maintaining adequate capital
for the same.
This shows need for more stringent
regulation to protect investor interests

GUIDELINES

#1 Comprehensive Compensation
Policy
Review compensation policy
Banks to conduct annual review of
compensation policy
Objective: Governance of compensation
Pros
Transparency & Equity
Policies to undergo
Supervisory review
No excessive compensation

Cons
Compensation not on banks
discretion
High returns not proportional
to higher risks

#2 Constitution of a Remuneration
Committee
Banks to establish a remuneration
committee (RC)
RC to oversee framing, review and
implementation
Objective: Governance of compensation
Pros

Cons

Majority members
RM committee unfamiliar with
independent non-executive
compensation principles
Training sessions needed for
directors
Close coordination between RC
RM members
and Risk Mgmt. Committee

#3 Compensation structure &

Schedule for WTDs/CEOs
Remuneration grants need RBI approval
Variable pay 70% of Fixed pay
Mix of total pay 60:40 (FP: VP)
Deferrals on VP 50% of FP
Malus and claw back clauses included
ESOPs not to be included in Variable
component
No sign-on bonus in up front cash
Objective: Alignment of compensation with
prudent risk taking

Pros
Discourages short term
approach to risk

Cons
No additional incentives on risk
taken
Precise ratio not prescribed by
European Banks
Malus & claw back clauses
demotivating in nature
Lesser freedom to PSBs to
offer competitive packages
Personal hedging/insurance
arrangements are prohibited

#4 Compensation structure & Schedule

for Risk control & Compliance staff
Compensation structure should be
weighted in favor of fixed compensation
Should not be significantly influenced by
business areas overseen by risk control &
compliance staff
Objective: Alignment of compensation with
prudent risk taking
Pros
Discourages short term
approach to risk
Business in risky sectors
discouraged

Cons

#5 Compensation structure & Schedule

for other categories of staff
Apply guidelines pertaining to WTDs/CEOs
to all other categories of staff as well
Bonus pools typically adjusted on basis of
organizational or business unit economic
profit, economic capital of return of RWAs
Objective: Alignment of compensation with
prudent risk taking
Pros
Aimed at meeting RBIs
supervisory oversight
Remuneration aligned with risk
and performance

#6 Annual disclosure of remuneration

in annual financial statements
Considerable effort needed to be spent on
meeting the new disclosure requirements
Not only WHAT, but also WHY and HOW of
compensation disclosure needed
Objective: Effective supervisory oversight
and shareholder engagement in
compensation
Pros
Methodology and process
given due importance

Cons
Lack of clarity on precise
disclosure obligations
Definition of other risk takers
undisclosed

PROBLEM
How will banking organizations in India
address practical issues while managing
the complex regulatory environment?

PLAN
STEP
#1 to work in tandem
Set up a Remuneration
Committee
with RM committee & identify components of
compensation and its role

Adjust the bonus poolsSTEP

on the#2
basis of organizational or
business unit economic profit, economic capital or the
return of risk-weighted assets

STEP #3
PSBs should optimize the weights assigned to the
performance metrics to best suit their strategic goals and
boost their returns

STEP #4

Identify the reasonable limit of compensation that can be paid while meeting
the regulatory requirements and minimizing the loss to the bank

STEP #5

Fixed compensation should be based on the function of the employee

STEP #6
Compensate for decrease in variable pay by issue of rights shares