When bankers’ pay was brought under scrutiny, no one saw this coming

While the compensation of top bank officials had to be approved by RBI even earlier, the scrutiny has increased since 2020. (Mint)
While the compensation of top bank officials had to be approved by RBI even earlier, the scrutiny has increased since 2020. (Mint)

Summary

  • In several instances, RBI has refused to approve a pay hike, delayed approving higher remuneration or even directed an outright pay cut for top executives of private banks

Despondency stalks boardrooms and corner offices of private banks, as the regulator keeps top-level compensation under its thumb to prevent risk-taking of the kind that led to the global financial crisis of 2007-08. In several instances, the Reserve Bank of India (RBI) has refused to approve a pay hike, delayed approving higher remuneration or even directed an outright pay cut.

For instance, six months after he was promoted as executive director at IDFC First Bank Ltd, Madhivanan Balakrishnan stepped down in December. In his resignation letter, Balakrishnan, who joined IDFC First in 2019 as chief operating officer, said he plans to pursue an opportunity in healthcare that matches his long-term plans for his family and offers higher pay.

Two bankers aware of the matter said on condition of anonymity that RBI had approved his new salary with a 25-30% cut (from above 3 crore earlier) after he was elevated as whole-time director in June 2023. The central bank felt Balakrishnan was already drawing a high package based on his previous experience at ICICI Bank Ltd (where he was chief technology and digital officer), and IDFC First being a smaller bank could not pay as much, they said.

“The logic that RBI gave in Balakrishnan’s case was that IDFC First Bank was in the second cluster of banks. The regulator is doing benchmark comparison based on the size of banks," the first banker said.

The issue gains importance because such oversight by RBI could lead to a talent crunch in the top management of private banks. “Balakrishnan’s exit has touched a raw nerve. The main question is, how to retain talent in banking if RBI continues to be so stringent with compensation," said a former chief executive officer (CEO) of a private sector bank.

When contacted, Balakrishnan said, “The opportunity that I am exploring has a higher compensation, which would certainly be beneficial given the last few years of my career. But I would like to reiterate that the primary reason for moving out is the bigger entrepreneurial opportunities that could open up for me and my family."

Then, Sumant Kathpalia, CEO of IndusInd Bank Ltd, has not received a pay hike since he was appointed to the post four years ago, the bank’s annual reports showed. Meanwhile, Pralay Mondal, currently CEO of Catholic Syrian Bank, had to take a 52% pay cut to 1.85 crore after he was promoted as deputy managing director from head of retail banking in 2021, the bank’s FY23 annual report showed.

Queries sent to RBI and the banks cited in this article, except IDFC First Bank, remained unanswered till press time.

“In the past several years, corporate India has seen salary increases run ahead of increases in revenues and profits. As a consequence, there is a pushback on executive compensation," said Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services India Ltd.

Tandon pointed out that in 2022, one in three resolutions relating to executive compensation was approved only because promoters voted for their own salary increase. “Against this background, compensation levels in banks are seen as being tempered, which is something that investors welcome. This and the regulatory oversight give investors much-needed comfort," he added.

The central bank issued compensation norms for whole-time directors and CEOs of private, foreign, payments and small finance banks in November 2019, pointing to the need to curb excessive risk-taking. It said executives were often rewarded for increasing short-term profit without adequate recognition of the risks and long-term consequences of their actions. The rules took effect in April 2020. In the US and the UK as well, rules on bank executives’ compensation were tightened in the wake of the global financial crisis.

Bankers complain that approvals for remuneration are delayed as well. HDFC Bank Ltd’s FY23 annual report said the remuneration of its current CEO Sashidhar Jagdishan and executive director Kaizad Bharucha for performance in FY22 was approved by RBI only in March 2023.

“RBI has been cutting salaries severely," the human resources (HR) head of a private bank said on condition of anonymity. “It has become a problem. Several of them have accepted because they feel that being a whole-time director can compensate for it in terms of prestige, responsibilities and recognition. As it (scrutiny) increases, more and more, there could be a flight of talent. RBI is aware, but is not too worried at this stage."

While the compensation of top officials had to be approved by RBI even earlier, the scrutiny has increased since 2020. In August, Mint reported about severe attrition levels at lower levels in private banks, with HDFC Bank, IndusInd Bank and ICICI Bank witnessing 34.15%, 51% and 30.9% attrition in FY22. RBI’s compensation rules for the top levels, while well-intentioned, could worsen the flight of talent from the banking sector.

Many senior executives do not seek a promotion as their compensation will come under RBI’s scrutiny once they become executive directors, the former HR head of another private sector bank said.

At India’s largest private lender, HDFC Bank, former CEO Aditya Puri’s last salary at the end of FY20 stood at 18 crore. In contrast, Jagdishan, who succeeded him and continues in the role, drew a salary of 10.5 crore in FY23.

Before 2019, most banks saw a higher average increase in remuneration of key management personnel compared to non-managerial staff, a Mint analysis of various banks’ annual reports showed.

Directors at private sector banks raised the compensation issue with central bank officials at a meeting in May 2023, the bankers cited earlier said. However, RBI justified the decision saying compensation comes under regulatory purview, they said.

“RBI has been hard-nosed about compensation packages over the last two years," the head of a private sector bank said. “They feel that bankers should earn less, and hence do not approve salary hikes recommended by the boards. The question is, what is the relevance of these boards and shareholders if RBI itself is taking the final decision? How can the salary of CEOs be decided based on the size of the bank? If the bank has announced an 8% bonus, then maybe the CEO gets only 1%," the banker said.

The guidelines mandate that a minimum of 50% of variable pay should be in the form of non-cash including employee stock options or share-linked instruments. It also capped variable pay at not more than 200% of fixed pay, with 60% of the total variable pay and at least 50% of the cash component of variable pay to be deferred.

The guidelines also allow for clawback of CEO salaries if any misconduct comes to light later. Former ICICI Bank CEO Chanda Kochhar was asked to pay back past bonuses after it was found that she did not follow the disclosure norms on conflict of interest. Similarly, former Yes Bank Ltd CEO Rana Kapoor’s past bonuses were clawed back over governance issues and poor performance.

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