The country's central bank - Reserve Bank of India has proposed that at least 50 percent of the compensation of the senior officials which includes Chief Executive Officers and Whole Time Directors of private and foreign banks should be variable in nature.
A discussion paper which proposed guidelines for the compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function Staff also states that the ESOPs should be added as a component of variable pay.
The RBI had issued compensation guidelines for implementation by the private sector and foreign banks for fiscal 2012-2013, way back in January 2012.
In a statement, it stated that "These (2012) guidelines are being reviewed, with an objective to better align with FSB (Financial Stability Board) Principles and Implementation Standards, based on experience and evolving international best practices".
It also added that the "Variable pay is to be capped at 200 per cent of fixed pay."
In the current existing guidelines, the variable pay is capped at 70 percent of the fixed pay but it does not include the ESOPs. The prospective guidance is slated to be effective from the ensuing financial year. The guidance also states that a minimum of 50 percent of variable pay has to be paid in non-cash component while making it mandatory for a compulsory deferral mechanism in case of variable pay, irrespective of the on the quantum of variable pay.
The paper noted that "It should be ensured that there is a proper balance between fixed pay and variable pay. The total variable pay shall be limited to a maximum of 200 per cent of the fixed pay (for the relative period).
"Within this ceiling, at higher levels of responsibility, the proportion of variable pay should be higher. The deterioration in the financial performance of the bank should generally lead to a contraction in the total amount of variable compensation paid".