The Reserve Bank of India (RBI) on Friday issued guidelines for the remuneration of key management and senior management of non-bank financial companies, in which it said financial companies must set up a nomination and remuneration committee. (NRC), which are mandated to oversee the development, review and implementation of the Company’s compensation policy with the approval of the Board.
In addition, NRC will also need to work with the Enterprise Risk Management Committee to achieve effective alignment between compensation and risk.
“NRC can ensure compensation levels are supported by the need to retain business profits and the need to maintain adequate capital based on the Internal Capital Adequacy Assessment Process (ICAAP) . The NRC can also ensure the “fit and proper” status of proposed/existing directors and that there is no conflict of interest in the appointment of directors to the company’s board, KMPs and senior management,” RBI said.
These guidelines will come into effect from April 1, 2023 and will be effective for all finance companies except those in the base layer. These guidelines are in line with the ladder-based regulations for NBFCs introduced by RBI in October last year.
In line with the guidelines, compensation packages will include fixed and variable compensation elements effectively aligned with prudent risk taking to ensure that compensation is adjusted to all types of risk. In addition, compensation outcomes should be symmetric with risk outcomes and compensation payouts should be sensitive to the risk time horizon.
RBI has stated that all fixed compensation elements, including perquisites and pension/retirement benefit contributions, can be treated as part of fixed salary.
And, the proportion of variable compensation in the total compensation of NBFC management should be commensurate with their role and profile of prudent risk taking and at higher levels of responsibility, the proportion of variable compensation should be higher. Variable compensation can even be reduced to zero based on performance at the individual, business unit and corporate level.
In addition, the NBFC Board of Directors may not offer guaranteed bonuses to senior management and key management personnel. “However, in the context of a new hire, an entry/hiring bonus could be considered. This bonus will not be considered as part of the fixed remuneration or the variable remuneration.