The Reserve Bank of India has set guidelines for compensation of senior bank executives, imposing restrictions on guaranteed bonus, severance pay as well as a cap on variable pay, in line with global moves to rationalise pay structures and curb risktaking.
The compensation practices, especially of large financial institutions, were one of the important factors which contributed to the recent global financial crisis, the RBI said in a statement posted on its website.
The RBI said perverse incentives have amplified the excessive risk taking that severely threatened the global financial system.
The RBI's guidelines are in line with steps taken by the global banking regulator to enforce sound compensation practices aimed at reducing incentives towards excessive risk, it said.
The RBI said joining or sign on bonus should only occur in the context of hiring new staff and be limited to the first year and guaranteed bonus should be in the form of employee stock option plans.
Private banks should not grant severance pay other than accrued benefits such as gratuity or pension except in cases where it is mandatory by any statute, the statement said.
The RBI also said variable pay for chief executives and whole time directors of private banks should not exceed 70 percent of the fixed pay in a year, and the variable pay can be deferred over a period of three years.
A deterioration in the financial performance of banks should generally lead to a contraction in the total amount of variable remuneration paid, it said.
In the event of an adverse performance, the bank would have the option to claw back deferred compensation, it said.
A clawback is a contractual agreement between the employee and the bank in which the employee agrees to return previously paid or vested remuneration to the bank under certain circumstances.
The bank said risk management staff should be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the bank.
Foreign banks operating in India will be required to submit a declaration to the RBI annually from their head offices that their compensation structure in India, including that of CEO's, is in line with the principles and standards of the Financial Stability Board, the global regulator.
The compensation norms will be applicable for all private and foreign banks from the financial year 2012-13.