RBI hints at sobering pay packages of foreign bank executives !

The contentious issue of CEO salary and compensation to the senior executives across organizations has often spurred adverse reactions from the general public at large.

A glaring example of this differential approach was witnessed during the 2008-recession; prior to which people wowed every record-breaking salary hike announced for the corporate honchos. However, post-recession, every major CEO salary hike got booed as discriminatory.

Of course, sky-high compensation packages are not always milk washed – while some are, indeed, discretionary in nature, others are truly undeserving; while a lot many are an outcome of supervisory oversight and lack of investor activism.

In latest, the RBI has set guidelines to restrict private sector and foreign banks operating in India by imposing restrictions on bonuses and remuneration packages of chief executives and whole time Directors; in a bid to rationalize salary structures and curb risk-taking in the industry which contributed to the recent global financial crisis.

 

Stressing on the need of regulatory reform for compensation policy, RBI quipped saying,

“Employees were too often rewarded for increasing the short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organizations. These perverse incentives amplified the excessive risk taking that severely threatened the global financial system.”

The sector regulator has further indicated that banks should ensure that the fixed portion of compensation is reasonable, taking into account all relevant factors such as industry practice, types of risk, etc.

Moreover, banks need to strike a balance between fixed pay and variable pay – wherein variable pay should not exceed 70% of the fixed pay in a year. Also, where the variable pay constitutes a lion’s share of the fixed pay, an appropriate portion of the variable pay, say 40% to 60%, must be deferred for over a period.

In addition, the RBI criticized the policy of guaranteed bonuses as inconsistent with risk management and compensation policy. It has also opposed the grant of severance pay other than accrued benefits such as gratuity, pension, etc. in most case scenarios.

At once, some of these RBI guidelines seems quite justified to me – but, hopefully, it does not go over-the-board in an industry which is already tightly regulated by the apex banker.

Banks are already obliged to maintain a fraction of their deposit liabilities in the form of liquid cash with the central bank, popularly known as CRR in financial jargon; and Statutory Liquidity Ratio (SLR) requirements, which is nothing but the amount of liquid assets to demand and time liabilities.

Then again, banks need to keep an eye on the proportion of their loan disbursements to various sectors such real estate, agriculture, manufacturing, etc. based on their risk profiles and priority lending requirements, as laid down by the RBI.

To say the least, there is no dearth of regulations in India on the banking institutions. Of course, India has been praised in the past for its tight regulation and conservative policies in the world of finance. But, we need to ensure that excessive regulation, especially, on the foreign banks does not take the sheen off the sector.

At a time when India is trying hard to woo foreign investments in varied sectors such as retail, aviation, energy, etc. it would be foolhardy to lay harsh regulation and distract attention of overseas inflows. What say?

Would it be wise to place excessive restrictions on pay packages of foreign banks in India?