KPI-linked pay plan may wane board autonomy: Insurers

In a discussion paper circulated among insurance company chiefs, the regulator proposed linking the remuneration of key managerial personnel (KMPs) to a defined KPI framework. The proposal has suggested a 40-30-30 evaluation structure, with 40% weightage linked to customer-related metrics, 30% to shareholder-linked parameters and 30% to regulatory compliance metrics.

“If 70% of a company’s KPIs are effectively determined by the regulator, then we are entering a very unique situation. Neither the RBI nor Sebi has this kind of micro regulation,” said the chief executive of a private life insurer.

Principle-Based Regulation

The executive added that while customer experience, claims settlement and expense management can form part of management evaluation, the regulator should limit itself to laying down broad principles and allow boards to frame actual performance metrics. “What role do the board and the nomination and remuneration committee play in defining these management outcomes?” the executive asked.

Irdai has argued that there is a need “to move beyond short-term financial performance and focus on sustainable, policyholder-centric outcomes”, noting that existing compensation structures are largely tied to revenue, profit and shareholder returns, and fail to adequately capture long-term value creation through customer outcomes. The regulator’s concerns stem partly from the high share of management expenses due to senior executive compensation.

“The intent is right, but the one-size-fits-all approach will not work,” said a senior executive at a private life insurer. They pointed to the Irdai’s existing expenses of management (EoM) regulations to highlight how uniform benchmarks impact insurers differently.

“There are 25 life insurers and more than 30 general insurers, each at a different stage of growth and maturity. How can remuneration frameworks for key managerial personnel across all these companies be standardised?” the executive quoted above said.

Perverse Incentives

Executives have also warned that the move could end up being counterproductive to Irdai’s objective of improving customer outcomes. “The regulator’s concern is genuine. The health insurance system has issues, but putting everything into managerial KPIs is not the solution,” said a senior executive at a private general insurer. “It could create perverse incentives where customer “complaints” are classified as “service requests” to show lower complaint numbers. This is already happening in some companies and could intensify.”

Another executive at a private general insurer said the lack of a level playing field within the industry makes uniform KPI-linked compensation structures difficult to implement. “The regulator has asked all insurers to reduce expenses by 5% every year, but three out of four PSU general insurers have been loss-making for several years. There is no level playing field.”

“With these proposals, shareholders and promoters are effectively reduced to providers of fresh capital while KPIs are being directed by the regulator. This could become counterproductive, especially at a time when the sector is being opened up further to foreign investors,” the executive added, describing the move as “going beyond regulation into policymaking.”

The Life Insurance Council and General Insurance Council have submitted feedback recommending greater flexibility for boards and nomination and remuneration committees to decide which customer-focused metrics are most relevant for their organisations.

Industry executives said it remains unclear whether Irdai will incorporate the suggestions or proceed largely with the original draft.