The Reserve Bank of India on Friday laid down broad guidelines for non-banking financial companies (NBFCs) to follow while determining compensation packages of their key management personnel (KMP) and senior management. These norms could be seen as the latest in a line of measures aimed at bringing greater regulatory parity between banks and non-bank lenders.
While compensation packages may comprise fixed and variable pay components, the proportion of variable pay must be commensurate with the role and prudent risk taking profile of KMP, the regulator said. “The variable pay should be truly and effectively variable and can be reduced to zero based on performance at an individual, business-unit and company-wide level,” the central bank said in a notification.
Not all the variable pay awarded after performance assessment may be paid immediately. A certain portion of the variable pay may be deferred to the time horizon of the risks.
The deferred compensation could be made subject to malus or clawback arrangements in the event of a subdued or negative financial performance of the company or employee misconduct.
The RBI mandated that senior personnel engaged in functions like financial control, risk management, compliance and internal audit may be compensated in a manner that is independent of the business areas they oversee and commensurate with their key roles in the company. In other words, such personnel will be expected to have a higher proportion of fixed compensation.
“However, a reasonable proportion of compensation may be in the form of variable pay, so that exercising the options of malus and/or clawback, when warranted, is not rendered infructuous,” the notification said. No guaranteed bonus will be paid to KMP and senior management, the RBI said.
However, in the context of new hiring, a bonus will be permitted. Such bonus will neither be considered part of fixed pay nor of variable pay.