The Hindu Business Line : Guidelines soon for CEO compensation packages

In the Second Quarter Review of Monetary Policy 2009-10, the Reserve Bank of India said it is working on the principles outlined in the Financial Stability Board for sound compensation and has proposed to issue suitable guidelines to private sector and foreign banks for the same.

This move by the RBI comes in the wake of the Union Corporate Affairs Minister, Mr Salman Khursheed, flagging the issue of corporate compensation packages.

According to the RBI policy, “The FSB has brought out certain principles for sound compensation practices. The principles call for effective governance of compensation, and for compensation to be adjusted for all types of risk, to be symmetric with risk outcomes, and to be sensitive to the time horizon of risks.”

Contentious issue

Explaining the central bank’s stance, Dr D. Subbarao, Governor, RBI, said that compensation packages of bankers have become a contentious issue in the wake of the global economic crisis. Internationally there is lot of debate about right sizing the compensation of bankers.

Private and foreign banks will have to refer the compensation packages to their respective boards and formulate the compensation structure for the senior management in accordance with the guideline before sending the proposal to RBI for approval.

The compensation sub-committee of the bank should certify that that proposal is consistent with its compensation package guidelines. “It gives some framework for RBI to take an informed decision,” Dr Subbarao said.

While speaking to Business Line, Dr Subbarao said, the issue is to sensitise the board of banks to look at the compensation structure more carefully than in a routine fashion.

“It is true that we have a differential compensation structure. Public sector banks chiefs get paid according to certain government norms and the private sector, I believe is market driven.

I don’t think it’s either an expectation or hope that compensation structures will come down. We just want bank managements to be sensitised to this. I think private sector compensations structures will be market driven and that’s the way it should be.”

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