Regulating the Pay of Bankers in the Private Sector

Last week, the Reserve Bank of India (RBI) issued compensation guidelines for implementation by private sector and foreign banks that become operational from the financial year 2012-2013. This approach is consistent with the trend that corporate governance norms in the banking sector tend to be more controlled than in other industry sectors. Apart from the fact that the pay of CEOs and wholetime directors requires the prior regulatory approval, the compensation guidelines set out detailed principles to be deployed in order for these banks to determine senior bankers’ pay.

The guidelines place emphasis on board’s oversight regarding compensation design and operation. For example, banks must constitute a remuneration committee consisting of independent directors that frames, reviews and implements the compensation policy. The guidelines also stipulate operational matters in sufficient detail, including the distribution between fixed component and variable component of the compensation. It encourages deferral arrangements in compensations so as to eliminate short-termism in the senior management’s approach. Other mechanisms, which received significant attention following the onset of the financial crisis, such as clawback arrangements are also required to be implemented. Reliance is also placed on greater disclosure of compensation arrangements, both at a quantitative level as well as qualitative level. While the guidelines stop short of imposing quantitative limits on pay, they set out stringent requirements that banks will have to comply with starting the next financial year.

On a related note, the Economist has a different take on the politics and economics of executive compensation generally, and bankers more specifically.