A banking CEO job or a job in the banking industry to aspire for the top job one day has always been on the top of the agenda of many financial services aspirants. But not anymore if one read the stringent compensation policy guidelines issued by the Reserve Bank of India (RBI). There are now restrictions on how much of variable pay one will get and also the clawback of bonuses and future variable component in case of poor financial performance. Will this make the bankers risk averse?
The private bank CEOs will now have to think twice before chasing growth or taking a risk in lending. Any wrong call would cost them heavily in terms of compensation.
The RBI's new compensation guidelines effective from April next year for CEOs of private banks, foreign banks, payments and small finance banks lay down rules of the game. In the past, private banks have often caught on the wrong side by the banking regulator. ICICI Bank saw a big fall in its growth post-2008 when the global financial meltdown hit the banking sector. Axis Bank under Shikha Sharma took bets in the infrastructure sector, which later came to haunt the bank. Similarly, the Yes Bank under Rana Kapoor expanded the corporate book by lending to the corporate which are now witnessing huge stress especially the real estate, aviation, NBFCs etc.
There is nothing wrong with chasing growth. In fact, the world over CEOs chase growth, which later translates into profits. But the post-2008 global financial meltdown, however, taught a lesson that banks are a different animal as any collapse of a banking entity, which receives public deposits, not only creates financial instability but also impacts the economy severely. The world economy is still to recover from the shocks of the global financial meltdown. Even after keeping the interest rates low and pumping in trillions of dollar into the US economy via a bond buyback, the world's largest economy is staring at a recession. The US Federal Reserve has now kick-started interest rate easing cycle and also put on hold the unwinding of its balance sheet.
The new compensation guidelines punish the CEOs severely for any misconduct or poor asset quality or underwriting poorly, which eventually results in poor financial numbers. " The deterioration in the financial performance of the bank should generally lead to a contraction in the total amount of variable compensation, which even be reduced to zero," states the RBI. The recent asset quality deterioration was the result of the Supreme Court order and also global overcapacity. The regulatory reasons ( RBI and IBC) also contributed to a fall in the banks' profitability.
The banks are now directed to put in place 'malus' and 'clawback' mechanism under the variable pay. A 'malus' permit the bank to put a stop on all or part of a deferment remuneration. Similarly, a clawback is an agreement signed between the CEO and the bank in advance to return the previously paid or vested remuneration to the bank. In the recent past, ICICI Bank CEO Chanda Kochhar was asked to pay back the past bonuses because of the service rules misconduct etc. Similarly, the Yes Bank CEO Rana Kapoor also saw bank holding back past bonuses.
The asset quality divergences would now automatically trigger a malus clause.
In terms of the compensation, a substantial portion of variable pay i.e 50 per cent should be variable pay. The total variable pay would be limited to a maximum of 300 per cent of the fixed pay. The variable pay includes share linked instruments (ESOPs) or a mix of cash and shares. The RBI has stated that there should be a proper balance between the cash and shares in the variable pay.
The new guidelines say that all the fixed items of compensation including the perquisites will be treated as part of fixed pay. In addition, all the perquisites that are reimbursable should also be part of the fixed pay. " The contributions towards superannuation and retirement benefits will be treated as part of fixed pay," states the RBI.