NEW DELHI: Did a bank CEO airbrush financials to prop up profitability, make inadequate provisioning of sticky loans or fail to meet regulatory norms of RBI, Sebi or IRDAI? He will no longer be able to leave his job with hefty payouts in the form of bonuses and stock options. New norms being framed the Reserve Bank of India (RBI) will ensure that such benefits are taken back from the CEO.
The RBI is working on a set of rules that would link remuneration of banks CEOs to parameters like balance sheet size of a bank, loan delinquency, profits and governance record. The proposed framework is expected to provide a broad template to the board of directors of banks while approving increase in salary, performance bonus and stock options to the senior most executive.
The RBI’s compensation package policy for bank CEOs will reduce “the scope for interpretation” on remuneration, and lead to a significantly higher price being paid by them by way of clawback of stock options and bonuses on non-compliance with the regulatory norms, according to a Business Standard report. The Economic Times had first reported about the RBI framing these new rules in January. A clawback provision enables a company to retrieve money already paid to an executive for various reasons.
The RBI is tightening the CEO compensation norms in the wake of instances of large non-performing assets and sharp practices adopted by top bank executives to dodge the regulators. The regulatory guidance that exists today is a general directive on the remuneration of senior officials in broad functions like ‘business’, ‘control’ and ‘risk’. What the RBI is considering is one that specifically relates to CEO compensation.
Two specific aspects of CEOs’ contract — the extent of variable pay and the possibility of including stock options in the same — will be up for review even as well-defined terms of clawback are set to be written in, according to the BS report. What is sought by way of outcome is to make the linkage between governance and compensation. The RBI is considering clear-cut clawback terms for stock options and bonuses, making non-compliance of regulatory norms the basis for clawbacks, making ESOPs part of the variable pay, bringing uniformity to how private banks tabulate CEO pay and narrowing the scope to interpret its norms by banks, says the report.
“Even today RBI clears the remuneration of a bank CEO and has the powers to claw back a slice of it in case of non-performance or governance lapses. However, a framework would ensure that the board does not have to shoot in the dark while approving the package for the CEO and referring it to RBI for its clearance,” a person aware of the plan had told ET in January.