Remuneration of banks' board members

According to the latest instructions, the State Bank has fixed the maximum limit of remuneration at Rs 800,000 to be paid to the board members of banks and DFIs and advised them not to award the consultancy or allied work to a director or to the firm, institution or a company in which he holds substantial interest. Further, board's remuneration committee will formulate a comprehensive and transparent remuneration policy for the Chairman and other directors. Such a policy should be made keeping in view the ownership structure, governance mechanism, risk profile, scope of operations, performance of banks/DFIs, etc., and will be approved by the shareholders on pre- or post-facto basis in the annual general meeting. The limit of Rs 800,000 is to be observed by those banks which have above Rs 500 billion assets or above Rs 1 billion after tax profit. All other banks/DFIs having assets less than Rs 500 billion or making profits (after tax) less than Rs 1 billion can pay remuneration up to Rs 500,000. However, the SBP has made it clear that these are the maximum remuneration limits and banks/DFIs may determine remuneration of their board members taking into account their governance structure and the level of responsibility and expertise of the concerned directors while remaining within the maximum limits. Travelling, board and lodging expenses of a director for attending board meetings will be paid by the bank/DFI at actual. In this connection, the remuneration policy should clearly specify the parameters for such expenses and any additional costs should be borne by the concerned director. The remuneration limits along with thresholds for assets size and profitability will be reviewed by the SBP after every three years.
Looking at the latest instructions issued by the SBP regarding the remuneration of directors and chairmen of the banks/DFIs, it appears that the guidelines given by the State Bank are quite comprehensive and meant specifically to check the practice by the directors or the chairmen to overcompensate themselves in one way or the other. It may be mentioned that this is not the first time that the SBP had to issue such instructions to check such a tendency prevailing in financial institutions. Previously, they were discouraged to hold the board meetings abroad and also asked to restrict perks and privileges awarded to board members. It is also no secret that sometimes directors/chairmen took undue advantage of their positions by awarding contracts of various kinds to their own companies at exorbitant rates. The direction by the SBP not to award the consultancy or allied work to a director or his firm will check the misuse of his position and benefit the banks/DFIs. It was also good to compensate the directors according to the size of institution and the efficiency, responsibility and expertise of the directors. While the directors of bigger institutions could get a maximum amount of Rs 800,000, the directors of smaller institutions have to be content with a maximum remuneration of Rs 500,000. However, while the instructions of the SBP advise the banks/DFIs to fix the remuneration according to the level of responsibility, expertise, etc., the parameters to judge these qualifications have been left to the discretion of the concerned institutions. The instructions regarding travelling, board and lodging expenses of a director shows that the SBP has almost covered all the areas of expenditures incurred on board members for attending board meetings. It seems clear that the board members will now be entitled to stay in hotels and incur other expenses for the duration of the board meetings and if they want to stay beyond the prescribed schedule, they have to make payments from their own pockets.
We feel that the instructions issued by the SBP are in good faith and very much in line with the policy of austerity by the present PTI government. The money saved could be utilised to pay higher rates of profits to the depositors, reduce the size of NPLs or increase reserves to meet future contingencies. While the money saved through the implementation of these instructions would be small, the circular gives a clear message to banks/DFIs that the days of extravagance and overspending by their top managements are almost over.