MONEY»
Central bank, private bankers deeply divided
KATHMANDU, AUG 19 -
One of the hottest topics now in the country’s financial sector is salaries and perks of officials of banks and financial institutions (BFIs). In the last two weeks, Nepal Rastra Bank (NRB) dispatched two letters to bankers seeking information on salaries of their top executives.
NRB’s first letter sought to know the difference in the salary of senior executives before and after their employment. The second letter sought bankers’ views on the huge salary differences between the chief executives and lower staff.
These two moves by the central bank are in line with the new monetary policy that has outlined ‘managing’ perks and benefits of directors, chief executive officers and other senior executives compatible with the country’s financial system.
The issue of whether perks and benefits of top executives, including CEOs, should be capped and whether there should be intervention by the central bank to settle the issue have divided NRB and the bankers. Neither side acknowledges but relations between them have soured in recent days. While bankers agree that their earnings need to be transparent, the central bank’s two letters has made them wary.
With salary issue being hotly debated in the public, NRB governor Yubaraj Khatiwada firmly asked the bankers not to sensitize this issue in a meeting with them on Wednesday. The NRB has called a meeting of the CEOs and directors next Monday to discuss their grievance and pave the way for settling the issue correctly. “It should be settled amicably,” said Sashin Joshi, president of Nepal Bankers Association.
The accountability issue is a global trend. Following the deep financial crisis in 2009-10, perks and salaries of CEOs from big companies including that of banks came under intense public scrutiny in the West. The issue of a CEO’s salary surfaced in Nepal last year when the central bank said it was for capping the bank’s chief executive salary. Bankers have been rejecting the idea of putting caps on CEO’s salary since NRB floated the idea in last September when NRB had started homework on introducing a set of guidelines to put a cap on perks and benefits of CEOs. Currently, CEOs of commercial banks are among the highest paid executives in the country with salaries ranging from Rs 350,000 to Rs 1.25 million a month. They also enjoy other non-financial facilities like vehicles, housing, helpers and travel costs, among others.
The governor had convened a meeting of chairman of commercial banks after the new monetary policy where he told them there was a huge salary gap between banks’ CEO and other top executives and urged them to look into it. In the same meeting, chairmen of some banks complained to the governor that the trend of ‘signing agreement’ has deteriorated CEOs’ hiring, forcing promoters to pay higher salary and perks.
In response to NRB’s call for bankers’ opinion on “a reasonable ratio” between the highest and the lowest level staff, Nepal Bankers’ Association (NBA) argued that the task of fixing perks and benefits for the chief executives of banks and financial institutions (BFIs) should be left to the board of directors of concerned institutions.
The bankers however avoided answering the central bank’s question on the reasonable ratio.
NBA’s letter states that any attempt by the central bank to regulate salaries of bank staffs on the basis of a specific ratio will violate existing law. As per clause 26 (5) of the Bank and Financial Regulation Act, perks and benefits of CEOs of financial institutions will be fixed by the board of directors of concerned institutions, they say.
A CEO in a leading commercial bank said that even in the recent financial crisis, fixed salary was never touched n the West; only “variable salary” linked with the profits was reduced. Unlike in the West, CEOs in Nepal mostly get only a fixed salary. “In our case, the salary rise is linked with the profit,” said Rajendra Khetan, chairman of Laxmi Bank. “The annual rate of salary rise of Laxmi Bank’s CEO is lower than the rate of profit of the bank.”
NRB officials insist they have no intention of fixing the salary and benefits but there are keen to have a set of criteria so that CEOs don’t take benefits without actually contributing to the bank’s financial strength.
The NRB sources say, the central bank is mulling measures that would be even more specific than that of Reserve Bank of India (RBI) which has recently introduced guidelines for compensation. The RBI guidelines don’t talk about capping the CEOs’ salary. It has entrusted the job to overseeing the compensation to the board of directors.
The probable measures, according to NRB sources, could be fixing the ratio between staff cost and that of the CEO, confining the maximum salary gap between the CEOs of two similar BFIs, and fixing ratio between the CEO’s salary and that of the lowest earning employee. “But the criteria could be loosened in case the CEO is assigned to improve a crisis-ridden BFI, for example,” said the official.
Still, bankers insist a detailed study is needed before taking a final call. “The central bank should conduct a study on standard procedures being practiced in the US, Europe and India before drawing any conclusion,” said a banker. “That would be in the larger good for the financial health of the institutions and the country as a whole.”
Indian Experience
The RBI’s “compensation guidelines” cover a fixed pay, perquisites, bonuses, severance package and pension plan, among others. It has also made it mandatory to obtain regulatory approval for grant of remuneration for full time directors and CEOs of banks. The banks are required to submit a copy of the policy to RBI and annually thereafter, after suitable annual review.
The RBI guideline also asked the bank’s board to constitute a Remuneration Committee (RC) comprising non-executive independent directors including the chairman to oversee the framing, review and implementation of the compensation policy of banks.
And, the annual increase in fixed pay should generally not be more than in the rate of 10-15 percent. The compensation for risk takers and senior managers in the bank should be based on compatibility with risk outcomes, sensitive to time horizon of risk. In case of variable pay, if it constitutes a substantial portion of total pay, 40-60 percent of that pay must be deferred for at least three years.
Posted on: 2010-08-20 08:43
Headlines
Advertisements
