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RBI proposes strict compensation norms for senior officials of private, foreign banks

27 Feb 2019 Evaluate

In order to curb excessive salary payout practices, the Reserve Bank of India (RBI) has proposed that at least 50 per cent of compensation of senior officials of private and foreign banks, including whole time directors and chief executive officers, ‘should be variable’. The RBI has also proposed that variable pay of CEO and whole-time directors, among other key personnel, should be capped at 200 percent of fixed pay. Earlier, variable pay was capped at 70 percent of fixed pay but did not include Employee Stock Option Plan (ESOP).

Apart from CEOs and whole-time directors, the proposed changes in compensation would be applicable for material risk takers and control function staff. It has also been suggested that ESOPs should be included as a component of variable pay. Further, it added that in case of divergence, no proposal for increase in variable pay (for the assessment year) should be entertained. In January 2012, the RBI had issued the compensation guidelines for implementation by private sector and foreign banks from the financial year 2012-13. These (2012) guidelines are being reviewed, with an objective to better align with FSB (Financial Stability Board) Principles and Implementation Standards, based on experience and evolving international best practices.

High pay packets and excessive risk-taking ways in the banking industry have been under the scanner ever since the global financial crisis of 2008. Employees were too often rewarded for increasing short-term profit without adequate recognition of the risks and long-term consequences for their organisations.

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