Salary Structure in the Indian Banking Sector- A Discussion Note

It is now widely acknowledged that the flawed incentive framework underlying the compensation structures in the advanced country banking sectors fuelled the crisis. Bank executives focused too much on short-term profits and compromised long term interests with disastrous consequences.

The Financial Stability Board has since evolved a set of principles to govern compensation practices and the Basel Committee has developed a methodology for assessing compliance with these principles. The proposed framework involves increasing the proportion of variable pay, aligning it with long-term value creation and instituting deferral and claw-back clauses to offset future losses caused by the executives.

However in India, public sector bank compensation is determined by the government with a very limited variable component. Private, foreign and local area banks in India are statutorily required to obtain RBIís regulatory approval for the remuneration of their wholetime directors and chief executive officers.

In evaluating these proposals in respect of Indian banks, Reserve Bank ensures that the compensation is not excessive, is consistent with industry norms, is aligned to the size of the bankís business and that the variable pay component is limited. In July 2010, RBI issued draft guidelines on Compensation of Whole Time Directors/Chief Executive Officers /Risk Takers and Control Staff. The guidelines require banksí boards to formulate and adopt a comprehensive compensation policy covering all employees (risk takers and control/compliance staff).

The gulf between public and private sector banks is huge. Largest Public Sector Bank. SBIís Chairman O P Bhatt's annual pay is at Rs 26.5 lakh, compared with Rs 3.40 crore of Aditya Puri, MD, HDFC Bank and Rs 2.08 crore of Chanda Kochhar, ICICI Bank MD and CEO. Shikha Sharma, MD and CEO of Axis Bank gets Rs 1.52 crore, Yes Bank's chief Rana Kapoor takes salary of Rs 1.28 crore and Uday Kotak, Kotak Mahindra Bank MD gets Rs 1.13 crore.


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