RBI issues new compensation rules for private and foreign bank bonds

MUMBAI: The Reserve Bank of India (RBI) issued compensation guidelines on Monday for full-time directors and executive directors of foreign, private, small finance, payment banks and local banks that demand the cash component of the 67 percent variable payment.

Banks must continue to formulate and adopt a comprehensive compensation policy that covers all their employees and conducts annual reviews, RBI said, adding that the new guidelines will be effective next April.

The regulator said that if the variable payment is up to 200 percent of the fixed payment, at least 50 percent should be in cash, and if the variable payment is greater than 200 percent, 67 percent should be paid to through non-monetary instruments.

It also wants banks to recover non-variable payment components if there is a divergence in the provision of NPA or the classification of assets exceeds the prescribed threshold for public disclosure.

The policy must cover all aspects of the compensation structure, such as fixed payment, requirements, performance bonuses, guaranteed bonds, compensation package, instruments linked to actions such as stock purchase option for employees plans, pension plans and tips, RBI said in a notification.

Foreign banks operating under the branch mode must continue to submit a statement to RBI annually from their headquarters confirming that the compensation structure of those working in the country are in accordance with the principles and standards established by the Financial Stability Board .

This, RBI said, will take this into account when approving CEO compensation.

Compensation proposals for CEOs and other staff of foreign banks that have not yet adopted the FSB principles in their home country should implement compensation guidelines as prescribed for private sector banks here.

Foreign banks that operate as wholly owned subsidiaries will follow the compensation guidelines prescribed for private sector banks.

The board of directors of the banks must establish a committee of nominations and remunerations to oversee the preparation, review and implementation of the compensation policy.

Banks should ensure that their directors/general managers/policyholders of material risks obtain compensation adjusted for all types of risks and compensation results that are synchronized with the risk results.

The guidelines say that banks should ensure that the fixed part of the compensation is reasonable, taking into account the relevant factors, including adherence to legal requirements and industry practices.

The variable payment can be in the form of instruments linked to shares, or a combination of cash and instruments linked to shares. There must be an adequate balance between cash and the components linked to shares in the variable payment, RBI said, but added that there must be an adequate balance between the fixed payment and the variable payment.

For senior executives, including full-time directors and other senior employees, in compliance with FSB implementation standards, deferral agreements must invariably exist for variable payment, regardless of the amount of the payment and that the deferral period It must be at least three years old. .

Deferred compensation must be fully granted at the end of the deferral period or extended throughout the deferral period, he said, adding that deferred compensation should be subject to recovery agreements in case of moderate or negative financial performance in the given year.

Banks will identify a representative set of situations in their compensation policies, which require them to invoke the recovery clauses that may be applicable in the full variable payment, RBI said.