The debate about excessive salaries to banking executives, which has become such a heated matter for the US is catching on in India as well. The RBI today said that remuneration package of top bank executives should not be â€œexcessiveâ€, even though it did not specify what it meant by excessive. It further said that both domestic and foreign lenders will have to take prior permission from it before fixing the remunerations of its CEOs and whole time directors. It said that Banking Regulation Act of 1949 prohibits excessive remuneration.
The RBI said that the fixed portion of the remuneration will have to be within limits, and added that there should be a balance between fixed and variable salary. It said that the variable salary component should not exceed the 70% limit.
The guidelines will go into effect from 2012-2013.
“As hitherto, private sector and foreign banks operating in India would be required to obtain regulatory approval for grant of remuneration to whole time directors or chief executive officers in terms of Section 35B of the Banking Regulation Act, 1949,” the RBI notification said.
“The approval process will involve an assessment whether the compensation policies and practices are in accordance with the Financial Stability Board (FSB) Principles,” it added.
The push to reduce excessive compensation is designed to reduce excessive risk taking by banks and financial institutions. It was this excessive appetite for risk, analysts say, that pushed the international economy into crisis during the 2007-2009 financial crisis.
Two years after the great recession officially ended, banks have not really corrected any of the practices that got them into the hole in the first place. The world may see a repeat of the crisis for exactly this reason. The failure of MF Global signaled that executives have learnt nothing from the crisis.