The guidelines on bank CEOs’ compensation lack clarity and call for a re-look in respect of private banks. And given the huge disparity in remuneration existing between private and public sector banks, RBI should consider realigning the remuneration of CEOs of public sector banks also in tune with the principles enunciated by the Basel Committee on Banking Supervision

The guidelines announced by Reserve Bank of India (RBI) recently in respect of compensation to whole-time directors and CEOs (chief executive officers) of private and foreign banks are in the direction of streamlining the system on the international principles, following the report of the Basel Committee on Banking Supervision and gives food for thought for the boards of private banks, as they were groping in the dark so far. Besides, there was no rational basis for the RBI to approve or disapprove proposals received from the banks recommending fancy salaries to their CEOs, resulting in considerable disparity in compensation of CEOs of private banks, especially between old and new generation banks.    

However, the RBI appears to have missed the woods for the trees as a few areas of executive compensation, which have a great relevance in the Indian context, are conspicuous by their absence. More so because, the compensation structure of CEOs of public sector banks is not even being attempted to be covered under the new dispensation without any rhyme or reason. 

Firstly, it is stipulated that effective alignment of compensation with prudent risk taking, i.e. compensation should be adjusted for all types of risk. Banking is basically a business of risk taking. From the branch manager right up to the CEO, everyone is required to take risks in his/her day-to-day functioning, as without taking a risk, you cannot run a bank. There are committees and committees to lay down guidelines for risk management and exposure norms, which are approved by the board of the bank and in some cases; even approved by the RBI. In view of this it would have helped matters, if the RBI had included in their guidelines a few quantitative parameters also to assess the element of risk which should be aligned to the compensation. 

Secondly it states that the deterioration in the financial performance of the bank should generally lead to contraction in the total amount of variable remuneration paid. Here the RBI has willy-nilly omitted to furnish the parameters for assessing the financial performance of the bank, and has not indicated even remotely, the expectations of RBI in evaluating the performance of the bank. Any performance can be assessed on different parameters with differing results. Banking in our country is not judged purely on the basis of a single yardstick of bottomline alone, though their share price may move in tandem with the net profits declared by the bank quarter after quarter. What is of paramount importance is that there should be uniformity in evaluating the performance of the banks taking into account the external environment as well. 

Thirdly, the guidelines stipulate that the banks are required to ensure that the fixed portion of the compensation is reasonable, taking into account all relevant factors, including the industry practice. What appears reasonable to one may not appear reasonable to another. At present the industry is full of distortions and there is no uniform practice to fall back upon. The guidelines could have been more specific or given general indications to arrive at a reasonable compensation that would have appeared more rational. Here it is appropriate to recall what NR Narayana Murthy, chairman emeritus of Infosys stated a few years back. He said that there had to be fairness in CEOs’ compensation in relation to the compensation of other employees. In effect, there cannot be huge difference between the top-most and the bottom rung of the ladder within an organization. The RBI could have given some such guidance so that the banking industry could have set a trail-blazing new trend in this sensitive area of the economy and given a new orientation to the whole concept of executive remuneration for others to emulate.

The guidelines of RBI are applicable only for private and foreign banks and do not apply to public sector banks, though they control nearly 70% of the banking business in our country.  In PSU banks the risk-reward ratio is totally skewed in favour of the bank and the CEO has not only to take the risk but also face the risk of being questioned for his decisions, that too after the event. And the reward they get for this double whammy is no comparison with the private sector. In all fairness, the RBI should persuade the central government to change the entire system of CEO remuneration prevailing at present in PSU banks and suggest an innovative performance-oriented system, that would have driven the banks to perform better and served the cause of the banking industry admirably. 

Any discussion on CEOs’ remuneration in banks would be incomplete without mentioning the unique example of Vikram Pandit, CEO of Citibank of the United States. When he found that his bank was in dire straits, he volunteered to accept a remuneration of $1 only for the whole year till the turnaround in the fortunes of the bank is achieved. This is a great example of personal sacrifice exhibited, maybe for the first time in the western world, by none other than a person of Indian origin, speaks volumes of how a seasoned banker can lead by example. Nearer home, we have the example of Mr Ananthakrishna, of Karnataka Bank. who has voluntarily foregone his remuneration of Rs1 lakh a month, when he was appointed as its non-executive chairman in July 2009.

Though these are rare examples of personal sacrifice for the sake of the institution, there is no gain saying that the CEO compensation in public sector banks too needs to be realigned in tune with the principles enunciated by the Basel Committee on Banking Supervision, and the RBI should at least initiate a debate in this regard in the larger interest of developing the banking industry on healthy lines in our country.     

(The author is a banking and financial consultant. He writes for Moneylife under a pen-name ‘Gurpur’)