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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Sharing a few thoughts @
    http://vswaminathan-vswaminathan-swamilook.blogspot.com/2012/01/payees-skills-x-pay.html

    Reproducing comment @ the Economist >
    On a reading of the article, also of the previous comments, the impression seemingly given is that, it cannot be flawed as bereft of any logic so long as for deciding the 'pay' (initially or over a period) the factor of individual 'skills' is applied as the essential criterion. But then, from a pragmatic point of view, 'human nature' and each one's ‘mindset’ being what they are, that cannot be taken to hold good, much less as a universal policy, or foolproof enough to be applied blindly. One reason is that, – after all, an appraisal by the management of payee's 'skills' is not a one-time affair; but would have to be a continuous process. Further, in order to be ideally effective, appraisal would require being by a higher-up competent enough, a man of known intellect and integrity, strictly impartial, so on and so forth. Again, without payee making full and sincere use of his skills, so as to justify his pay, fixation of pay based on the factor of 'skills' alone may prove a 'flawed logic'. All said, one is left painfully wondering whether there could conceivably be any expert
    solution, really workable!>

    On the other linked article, of specifics to 'bankers', some of the posted comments are seen to truly portray the sharp reactions, justifiably so,of those at the receiving end (i.e. the 'depositors' serv(ic)ed by the so-dubbed financiers). Albeit, in final analysis, the bankers' relationship to the 'depositors' is that of 'trustees' in every sense of it.

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