{"id":221784,"date":"2019-11-05T13:00:31","date_gmt":"2019-11-05T07:30:31","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=221784"},"modified":"2019-11-05T11:51:08","modified_gmt":"2019-11-05T06:21:08","slug":"guidelines-on-compensation-of-whole-time-directors-chief-executive-officers-material-risk-takers-and-control-function-staff","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2019\/11\/05\/guidelines-on-compensation-of-whole-time-directors-chief-executive-officers-material-risk-takers-and-control-function-staff\/","title":{"rendered":"Guidelines on Compensation of Whole Time Directors\/ Chief Executive Officers\/ Material Risk Takers and Control Function staff"},"content":{"rendered":"<h3 class=\"head\" style=\"text-align: center;\"><span style=\"color: #0000ff;\"><strong>Guidelines on Compensation of Whole Time Directors\/ Chief Executive Officers\/ Material Risk Takers and Control Function staff<\/strong><\/span><\/h3>\n<p style=\"text-align: justify;\">The <span style=\"color: #ff0000;\">compensation practices, especially of large financial institutions, were one of the important factors which contributed to the global financial crisis in 2008.<\/span> Employees were often rewarded for increasing short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organisations. These perverse incentives amplified excessive risk taking that severely threatened the global financial system. The compensation issue has, therefore, been at the centre stage of regulatory reforms.<\/p>\n<p style=\"text-align: justify;\">2. In the wake of financial crisis, in order to address the issues in a coordinated manner across jurisdictions, the Financial Stability Forum (later the Financial Stability Board i.e. FSB) brought out a set of Principles (FSF Principles for Sound Compensation Practices, dated April 02, 2009) and Implementation Standards (FSB Principles for Sound Compensation Practices &#8211; Implementation Standards, dated September 25, 2009) on sound compensation practices. The Principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes. The Principles call for effective governance of compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and stakeholder engagement. The Principles have been endorsed by the G-20 countries and the Basel Committee on Banking Supervision (BCBS). The Implementation Standards are specific norms, prioritizing the areas that should be addressed by firms and supervisors to achieve effective global implementation of the Principles.<\/p>\n<p style=\"text-align: justify;\">3. The BCBS published in May 2011 the final report on \u2018Range of Methodologies for Risk and Performance Alignment of Remuneration\u2019. The main objectives of the report are (a) to present certain remuneration practices and methodologies that support sound incentives; and (b) the elements influencing the effectiveness of risk alignment that should be considered by banks when developing their methodologies as well as by supervisors, when reviewing and assessing banks\u2019 practices. In July 2011, the BCBS in consultation with the FSB has also published Pillar 3 disclosure requirements for remuneration.<\/p>\n<p style=\"text-align: justify;\">4. Taking into account the stipulations in these documents, Reserve Bank had issued the Guidelines on compensation vide Circular <a class=\"links\" href=\"https:\/\/www.rbi.org.in\/Scripts\/NotificationUser.aspx?Id=6938&amp;Mode=0\" target=\"_blank\" rel=\"noopener noreferrer\">DBOD No.BC.72\/29.67.001\/2011-12 dated January 13, 2012<\/a>, applicable to Whole Time Directors \/ Chief Executive Officers \/ Risk Takers and Control Function Staff, etc. for implementation by private sector and foreign banks from the financial year 2012-13.<\/p>\n<p style=\"text-align: justify;\">5. These Guidelines have since been reviewed based on experience gained and evolving international best practices. The objective has also been to better align these Guidelines with FSB Principles and Implementation Standards for Sound Compensation Practices and the Supplementary Guidance issued by FSB in March 2018 on the use of compensation tools to address misconduct risk. Consequently, a Discussion Paper on the proposed Guidelines was published on the RBI website and comments were invited from banks and other interested parties by March 31, 2019.<\/p>\n<p style=\"text-align: justify;\">6. The final Guidelines, taking into consideration the responses received, are given in the <a class=\"links\" href=\"https:\/\/www.rbi.org.in\/Scripts\/NotificationUser.aspx?Id=11720&amp;Mode=0#AN1\">Annex<\/a>.<\/p>\n<p style=\"text-align: justify;\">7. These Guidelines will be applicable for pay cycles beginning from\/after April 01, 2020. All applications for approval of appointment\/re-appointment or approval of remuneration\/revision in remuneration of Whole Time Directors (WTDs)\/ Chief Executive Officers (CEOs) shall be submitted with full details as prescribed in <a class=\"links\" href=\"https:\/\/rbidocs.rbi.org.in\/rdocs\/content\/pdfs\/89GCWI041119_A1.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Appendix 1<\/a>.<\/p>\n<p style=\"text-align: justify;\">8. Private sector banks, foreign banks operating under the Wholly Owned Subsidiary mode (WOS), and foreign banks operating in India under the branch mode are required to obtain regulatory approval for grant of remuneration (i.e. compensation) to WTDs\/ CEOs in terms of Section 35B of the Banking Regulation Act, 1949 (B.R. Act, 1949). The approval process will involve, inter alia, an assessment of whether the bank\u2019s compensation policies and practices are in accordance with the Guidelines set out in the <a class=\"links\" href=\"https:\/\/www.rbi.org.in\/Scripts\/NotificationUser.aspx?Id=11720&amp;Mode=0#AN1\">Annex<\/a>, and the BCBS Methodologies detailed in <a class=\"links\" href=\"https:\/\/www.rbi.org.in\/Scripts\/NotificationUser.aspx?Id=11720&amp;Mode=0#AP2\">Appendix 2<\/a>.<\/p>\n<p style=\"text-align: justify;\">9. In view of above, the instructions issued vide the circular <a class=\"links\" href=\"https:\/\/www.rbi.org.in\/Scripts\/NotificationUser.aspx?Id=6938&amp;Mode=0\" target=\"_blank\" rel=\"noopener noreferrer\">DBOD No.BC.72\/29.67.001\/2011-12 dated January 13, 2012<\/a> stand superseded with effect from April 01, 2020.<\/p>\n<hr \/>\n<p><strong>Reserve Bank of India<\/strong><\/p>\n<p style=\"text-align: right;\"><strong>[Press Release dt. 04-11-2019]<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Guidelines on Compensation of Whole Time Directors\/ Chief Executive Officers\/ Material Risk Takers and Control Function staff The compensation practices, especially of 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