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Pvt, foreign banks cannot pay ‘excessive’ salary to CEOs: RBI

Mumbai: The Reserve Bank today said CEOs and staff of private and foreign banks cannot draw “excessive” salary, but it did not impose any cap on their remuneration.

Issuing guidelines on compensation of CEOs and staff of private and foreign banks, RBI said all private and foreign lender will have to obtain prior approval from it for renumeration of CEOs and whole time directors as per the Banking Regulation Act, 1949 which prohibits excessive renumeration.

However, the guideline did not specify what would constitute excessive renumeration.
Banks are required to ensure that the fixed portion of compensation is reasonable, taking into account all relevant factors, including the industry practice, it said.

While designing the compensation arrangements it should be ensured that there is a proper balance between fixed pay and variable pay, it said. Variable pay, however, should not exceed 70 per cent of the fixed pay in a year.

The guidelines would be implemented from 2012-13.

“As hitherto, private sector and foreign banks operating in India would be required to obtain regulatory approval for grant of remuneration to whole time directors or chief executive officers in terms of Section 35B of the Banking Regulation Act, 1949,” RBI said in a notification.

“The approval process will involve an assessment whether the compensation policies and practices are in accordance with the Financial Stability Board (FSB) Principles,” it said.

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.

The RBI guidelines said banks should formulate and adopt a comprehensive compensation policy covering all their employees and conduct annual review.

The process of framing or reviewing the policy should be completed by March 2012, it said.

Among the bankers who are 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.

According to the information available from RBI under the 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.

The guidelines directed the 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.

It is to be noted that the RBI last year had deferred the implementation of its guidelines on compensation including salary for CEOs and other top executives in private and foreign banks till 2012-13.

The guidelines had been due to be implemented in 2011-12 but the Reserve Bank of India said the move was deferred to give banks sufficient time to frame their policies.

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