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Reining in Bankers’ Pay
The Reserve Bank of India’s guidelines on compensation for top management of banks are more generous in respect of variable pay than those of the European Union. However, they are a step forward in that they address an important lacuna in the existing guidelines: the non-inclusion of stock options in variable pay. The guidelines should serve to set a cap on the total compensation payable to bankers. As important are the disclosures in respect of top management compensation that the guidelines mandate.
You cannot leave bankers’ pay to the market any more than you can leave banks to the market. This realisation has gained ground since the global financial crisis of 2007. Regulators everywhere have sought to rein in bankers’ pay, although some, such as those in the United States (US), have been less enthusiastic about doing so than others.
The Reserve Bank of India (RBI) had issued guidelines on bankers’ compensation in January 2012. The guidelines limited variable pay to 70% of fixed pay. However, the guidelines did not cover stock options; they only included the payment of cash. Stock options have been the most important component of variable pay at private banks. Leaving stock options out rendered the limit on the variable pay quite meaningless.
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