The Reserve Bank of India (RBI) on Friday proposed slashing salaries of CEOs and directors of private banks if they performed poorly, limiting hikes to 15% and curbing bonuses, mimicking regulatory proposals in other parts of the world.

The draft regulations on compensation of private banks comes within days of the US Congress passing a major financial reform bill to discipline firms on Wall Street.

Coincidentally, a finance ministry panel has only this week recommended better pay for chiefs of public sector banks. In the draft, RBI has hit out at guaranteed bonuses saying they are not consistent with sound risk management or productivity-linked principles and proposed that they should not be a part of a compensation plan.

Bonus should only be given for hiring new staff and be limited only to the first year, the draft said. However, this payment should be in the form of employee stock options (Esops) only, since advance payments would create perverse incentives and promote undue risk-taking.

Executives of state-run banks are perceived to get salary packages way below those of their private sector counterparts. Chanda Kochhar, chief of the countrys largest private sector bank, ICICI Bank, received a remuneration of Rs 1.73 crore in 2009-10, as against market leader and state-run lender SBI chief OP Bhatts Rs 26.51 lakh.

According to data for fiscal year 2009-10 , the number of top executives at private sector banks getting remuneration in excess of Rs 1 crore a year is more than their counterparts in any other sector.

Top executives of 25 private sector banks, including chiefs of ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank and DCB, figured among the 200-odd such persons during the year ended March 2010.

While the government fixes salaries for public sector bank chiefs, private banks need a clearance from RBI for remuneration of their top executives, but currently there is no cap. For its part, RBI has proposed limiting annual salary hikes of CEOs or wholetime directors of private banks at 10-15%, besides a provision for slashing remuneration in case of poor financial showing.

The proposals were part of draft regulations on compensation of private sector, local area and foreign banks and are significant given the fact that high salaries and bonuses of bankers (despite their institutions faring badly) were blamed for the 2008 global financial meltdown.

In case of wholetime directors (WTDs)/CEOs, the annual increase in fixed pay should not be generally more than the range of 10-15%, the draft said. RBI has, however, suggested autonomy for private sector banks for paying perquisites to senior staff in line with the existing practices.

The central bank also proposed that private sector banks must ensure that there is a proper balance between fixed pay and variable pay. At higher levels of responsibility, the proportion of variable pay may be higher. The variable pay could be in cash, stock-linked instruments or a mix of both, the draft proposal said.

However, deterioration in financial performance of banks should generally lead to contraction of variable pay. Where the variable pay constitutes a substantial portion of total pay, 40-60% of this remuneration must be deferred for a minimum of three years.

A substantial portion of deferred variable pay should be awarded in shares or share-linked instruments like Esops and should conform to Sebi guidelines. The remaining portion of deferred compensation should be paid as cash compensation gradually.

In case there is negative contribution of the bank in any year during these three years, any unpaid portion of deferral compensation should be clawed back. In case of foreign banks, RBI said if the compensation is not properly aligned to risks or there are other lacunae, the issue will be taken up with the home-country regulator.

Private sector banks may have to submit a copy of their compensation policy to RBI, if the draft proposals go through. The draft also proposes to make it binding on private sector banks to constitute a remuneration committee on their board.

Currently, the compensation committee of each of the foreign and private sector banks clears salaries of CEOs and then refer it to RBI for its final nod, but it is not binding. As for public sector banks, remunerations of chairmen are fixed by the government.