Finally, after months of hue and cry, Nepal’s central bank has finally fixed perks and benefits of CEOs of banks and financial institutions (BFIs). Well, in reality they have not capped it per se. It only gave guidelines to fix perks and benefits. The BFIs’ board is entrusted with the responsibility to fix perks and benefits in such a way that it does not violate the guidelines set by the Nepal Rastra Bank (NRB), the central bank. These guidelines are broad and will appease the public, who have been irked by the ultra-grandeur of bank executives, their high flying lifestyle and contributing to increasing income inequality at least in the banking sector.
Earlier, I had argued that NRB’s mandate is not to fix perks and benefits. It can, however, outline a set of indicators to determine salary and benefits. Currently, the salary of a CEO at a commercial bank ranges from Rs 500,000 to Rs 1.4 million a month.
Here are highlights of the new guidelines (sourced from Milan Mani Sharma’s article in today’s edition of Republica daily):
- NRB has asked the BFIs to limit the fixed annual salary and allowances for chief executives to less than 5 percent of the average staff expenses incurred over the previous three fiscal years or less than 0.025 percent of the company´s total assets at the end of the previous fiscal year, whichever is lower.
- It also bars BFIs from paying the incentives at one go. In case the incentive exceeds 40 percent of annual salary and allowances, BFIs should pay just 40 percent of the total amount within that fiscal year and distribute the rest in equal proportions (of 20 percent) over the next three fiscal years.
- If the BFI plunges into loss during that period, it is to reverse all the deferred incentives and account them as income.
- NRB has asked banks and financial institutions to cover the bill of just one telephone or cell phone.
- Vehicles to be provided to chief executives must not cost more than 50 percent of their annual salary and allowances. It bars BFIs from providing another vehicle to a CEO throughout his term, even in case of renewal of his or her term.
- BFIs are allowed to cover the fuel bill and salary of one driver for each CEO. They can cover the bills of the CEO´s professional memberships, internet use, newspapers and magazines, but the extent of such coverage must not exceed 0.50 percent of annual salary and allowances.
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The cap will not be applicable to banks and financial institutions that are in trouble.
Likewise, banks and financial institutions are exempted if they are undergoing restructuring with donor assistance or if they are institutions in which the government has a full or partial stake (such as Rastriya Banijya Bank, Nepal Bank Limited and Agricultural Development Bank).
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The cap will not effect the branches of foreign banks (like Standard Chartered Bank Nepal) either.
Here is what I commented and proposed two months ago:
When job market is stagnating, macroeconomic situation deteriorating, inflation staying at a very high level, and opportunities squeezing, it obviously fuels anger when people read about executives fetching monthly salaries that an average citizen cannot even earn in his lifetime. This is something BFIs and executives should ponder upon because it independently fuels anger in the society they themselves are a part of. The government and central bank could give into public pressure any time.
There could be a middle path to business and moral dimensions to the executive pay debate. For instance, a “fair” way could be that executives’ paycheck may be a function of a basket of indicators: Long-term growth prospects, overall debt, non-performing loans, rate of return from unproductive sectors (which should have minimal weight as the returns appear to be cyclical in nature), long-term rate of return from productive sectors, and diversification of investment and loan portfolios, among others. If there are strict, transparent and easily comprehensible criteria, then there would not be much controversy over this issue, which has been wrongly taken up by the central bank while failing to fulfill its explicit mandate.
