Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online-views/  Playing paymaster
BackBack

Playing paymaster

Playing paymaster

Illustration: Jayachandran/MintPremium

Illustration: Jayachandran/Mint

An economist walks into a bar, goes a joke, and is asked: What are the two fundamental things about economics? One is that incentives matter. Two, there is no such thing as a free lunch. Economists may bicker about everything else, but incentives are “one thing" they can’t ignore. Let’s hope the Reserve Bank of India (RBI) doesn’t ignore it either.

This “one thing" is key to making headway in the global debate over executive pay at banks—with large bonuses, the West’s masters of the universe had their eye on short-term greed instead of long-term need—a debate RBI weighed in on last week with its first ever draft guidelines for compensation at private and foreign banks. If incentives do matter, financial regulators must stay aware of two points.

Illustration: Jayachandran/Mint

That’s why regulators should keep a close watch, as RBI is doing. We don’t know how it has intervened in compensation matters before, but it’s good that the central bank is finally offering a coherent policy.

But, second, regulators should also know how to keep a close watch. Instead of spending too much time focusing on specific levels of pay, we think they should focus on the general structure of incentives. Here, it’s unclear where RBI stands.

Though it seems interested in overall pay structures, RBI has now suggested that annual increases in fixed pay shouldn’t be more than 10-15%. It also recommends that banks offer bonuses specifically through stock options, which aren’t cashed in immediately. These diktats are troubling, not least because they remind us of a socialist India with wage controls.

In today’s India that’s anyway suffering from a shortage of professional talent, hard caps on salary raises will only drive competent managers to other firms. And we don’t know how India, where cash is still king, will adapt to a sudden proliferation of stock options. The US has seen cases of options backdating, where options are possibly fraudulently issued at a later date, to get a favourable price.

That’s why incentives matter. India’s regulators should keep this in mind while finalizing these guidelines, lest the joke be on them.

Banker’s pay: to regulate or not to regulate? Tell us at views@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 05 Jul 2010, 09:01 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App