Welcome step on bankers’ remuneration

Welcome step on bankers’ remuneration

The Reserve Bank of India’s (RBI) decision to lay down a compensation structure for CEOs, executive directors and senior officials of private banks is welcome. It should introduce such a pay structure for public sector banks as well. RBI is right to emphasise greater weight for variable pay in the total pay, and seek clawback provisions. But it has to be mindful that banks might need to draw in talent from other businesses where remuneration is not regulated. Scrapping guaranteed bonus, clawing back employee stock options (Esops), and slashing variable pay for extra divergence in sticky loans will encourage discipline and transparency in leveraged institutions, which as custodians of household savings, have to preserve capital to avert bailouts at the cost of shareholders and taxpayers. But rules to include Esops in variable pay and cap the variable pay at three times the fixed pay can make it tougher for banks to hire top talent — particularly non-bankers.

Besides, in a deferral pay arrangement, calculating Esop value, which rises or falls with stock price, can act as disincentive. Salaries of bankers across markets came under scrutiny after the 2008 meltdown, with all regulators consulting the principles endorsed by the Financial Stability Board and the Basel Committee on Banking Supervision. A core principle is to align remuneration not so much with financial performance as with prudential management of risk and achievement of desired control. RBI does not limit equity-linked components to Esops, true, but care has to be taken to design equity-linked schemes that do not promote short-term behaviour. Most developed countries preferred to exclude Esops from variable pay.

RBI should continue to evaluate pay structures and the conduct they induce, but refrain from micromanagement.