Mumbai: The compensation packages and bonuses of chief executive officers, or CEOs, of private and foreign banks have come under the regulatory scanner in the second quarter policy review of the Reserve Bank of India (RBI), which said that it will issue guidelines to ensure sound remuneration policies for the banking sector.
It is already working on Financial Stability Board (FSB) principles to formulate such guidelines for private and foreign banks. FSB—comprising senior representatives of national financial authorities (central banks, regulatory and supervisory authorities and finance ministries), international financial institutions, standards-setting bodies and committees of central bank experts—has been established to address vulnerabilities and to develop and implement strong regulatory, supervisory and other policies to maintain financial stability.
The remuneration of CEOs of private and foreign banks are cleared by RBI on a case-by-case basis after the compensation committee at each bank clears it. CEO salaries at public sector banks are set by the government. Employees of public sector banks, however, are paid in accordance with an industry-wide wage pact that lasts for five years.
“Compensation practices, especially of large financial institutions, were one of the factors which contributed to the recent global financial crisis,” RBI governor D. Subbarao said. He has reiterated in the policy review that the FSB principles for compensation will be the guiding tenets for all employees in a financial institution.
Executive compensation: ICICI Bank MD and CEO Chanda Kochhar has been offered an annual salary between Rs84 lakh and Rs1.62 crore. Abhijit Bhatlekar/Mint
The FSB report on improving compensation practices, which has been endorsed by the Group of Twenty (G-20) countries, has proposed an independent and effective board to oversee compensation practices, linking total variable compensation pool to the overall performance of the firm, and maintaining a sound capital base. It also proposes limits on guaranteed bonuses, enhanced public disclosure and transparency of compensation, and enhanced supervisory oversight of pay, including sanctions if necessary.
Subbarao’s latest proposal, however, has drawn mixed reactions.
“The Reserve Bank of India has realized that there needs to be a consistent and transparent policy on compensation,” said R.H. Patil, chairman of Clearing Corp. of India Ltd, who is also the chairman of the remuneration and nomination committee of private sector Axis Bank Ltd. “The compensation of the head of a institution should be consistent with the performance of the bank driven by strong banking business rather than short-term trading profits.”
“There has been lot of criticism doing rounds on the pay packages of senior executives, (but) you have to look at the market compensation,” said S.B. Mathur, who is chairman of at least eight companies, including National Stock Exchange of India (NSE) and Infrastructure Leasing and Financial Services Ltd. “If it’s not commensurate with the market, companies fear loss of talent.”
He added that while this may not be the case in a financial crisis, executives move when they are offered better salaries during better times. “The Reserve Bank of India should ensure that the guidelines are not out of sync with market reality,” he said.
The managing director (MD) and CEO of a private sector bank disagreed with the perception that Indian banking chiefs are overpaid. “The Indian banking sector does not have bizarre salaries like some of the other sectors,” he said on condition of anonymity.
Chanda Kochhar, managing director and CEO of India’s largest private sector bank, ICICI Bank Ltd, has been offered a salary between Rs84 lakh and Rs1.62 crore annually, valid through March 2014. Her predecessor K.V. Kamath, who stepped down in May, was paid Rs1.37 crore for 2008-09. ICICI Bank—which had assets of Rs3.67 trillion and net profit of Rs878.22 crore for the first quarter ended 30 June—has decided not to sanction any performance pay for 2009 and will also not grant stock options to directors.
Aditya Puri, MD and CEO of the country’s second largest private bank, HDFC Bank Ltd, receives basic pay in the range of Rs1.08-1.32 crore. The balance sheet size of the bank was Rs1.93 trillion at the end of the quarter ended 30 September, while profit was Rs687.46 crore.
Shikha Sharma, MD and CEO of Axis Bank, the third largest private sector bank by assets, has been offered a basic pay of Rs1.25 crore. The bank’s balance sheet was worth Rs1.51 trillion at the end of September 2009 and its net profit was Rs531.64 crore.
In addition to basic pay, the salary packages of Puri and Sharma include performance bonuses and other allowances, as well as stock options.
Axis Bank’s Sharma will get a variable bonus, to be decided by the bank’s remuneration and nomination committee, subject to a maximum of 25% of the salary drawn during the year. CEOs of public sector banks, in contrast, get an annual salary of around Rs12 lakh, following the implementation of the Sixth Pay Commission’s recommendations that increased their existing salaries by at least 60%. Public sector banks account for close to 80% of the banking industry by assets.
Earlier this year, corporate affairs minister Salman Khursheed warned firms against huge compensations for top executives. Later, however, Prime Minister Manmohan Singh clarified that the government would leave it to the boards of companies to decide on capping compensations for senior executives.
Earlier this month, The New York Times reported that the US government would ask at least seven firms that received the largest government bailouts, including Citigroup and Bank of America, to cut total compensation of their 25 most paid executives by an average of almost 50%.