Compensation of key managerial personnel in NBFCs needs to be reasonable: RBI

Mumbai: The RBI on Friday said the compensation of key managerial personnel and those in senior management roles in NBFCs needs to be reasonable, recognising all relevant factors including adherence to statutory requirements and industry practices.

The banking regulator has released the guidelines that will be applicable for fixing the compensation policy of KMPs (Key Managerial Personnel) and members of senior management of all Non-Banking Financial Companies (NBFCs) under Scale Based Regulatory (SBR) framework, except those categorised under 'Base Layer' 3 and government-owned NBFCs.

As per the guidelines, the boards of all NBFCs shall constitute a Nomination and Remuneration Committee (NRC).

''The compensation packages may comprise of fixed and variable pay components aligned effectively with prudent risk taking to ensure that compensation is adjusted for all types of risks, the compensation outcomes are symmetric with risk outcomes, compensation payouts are sensitive to the time horizon of the risks, and the mix of cash, equity and other forms of compensation are consistent with risk alignment,'' it said.

The guidelines also define composition of fixed pay and variable pay.

It further said guaranteed bonus may not be paid to KMPs and members of senior management.

However in the context of new hiring, joining/sign-on bonus could be considered, it said, and added, such bonus will neither be considered part of fixed pay nor of variable pay.

Also, the deferred compensation may be subject to malus/clawback arrangements in the event of subdued or negative financial performance of the company and/or the relevant line of business or employee misconduct in any year.

A malus arrangement permits a firm to prevent vesting of all or part of the amount of a deferred remuneration.

A clawback is a contractual agreement between the employee and the firm in which the employee agrees to return previously paid or vested remuneration to the NBFC under certain circumstances.