New regulations seek to ensure that executive wages do not weigh down banks’ performance. FILE
By GEORGE NGIGI
In Summary
- The new regulations will see bank executives’ pay tied to the size of business that they handle.
New regulations that will, among other changes,
peg bonuses of senior bank staff on risks they expose lenders to and
require disclosure of compensation details of executive pay in the
annual reports are now effective.
This follows the expiry on December 31 of a
one-year transition period granted by the Central Bank of Kenya (CBK) to
allow time for compliance.
The new regulations will see bank executives’ pay tied to the size of business that they handle.
The regulations seek to ensure that executive
wages do not weigh down banks’ performance, especially in instances
where the business is underperforming or is loss-making. Lenders will be
required to break down their wage bill and explain the criteria used
for performance measurement and risk adjustments.
New business
“This means if your work is bringing new business
to the bank we won’t just look at the size of portfolio but also how it
is performing,” said a senior risk officer mandated with implementing
the new rules in his bank but who sought anonymity as he is not
authorised to speak to the media.
Commercial banks have in the past relied on
salespersons to bring new businesses, with their compensation tied to
the volume of loans they lent out without consideration of how those
debts later affected the institution.
The regulations are in tandem with the global
trend that has seen new laws enacted to rein in bank executives’ pay and
risk taking.
The new regulations allow for “clawbacks,” meaning
that money paid out to employees for their exemplary performance can be
recovered in future if their actions lead to losses or drag overall
performance of banks.
Golden handshakes
The new rules also discourage banks from signing
binding “golden handshake” agreements with their executives which are
payable regardless of performance of the institutions that they lead.
Golden handshakes are clauses in employment
contracts that offer executives sumptuous and sometimes outrageous
benefits in the event that their contracts are terminated mid-term.
Kenya Bankers Association said the regulations
will not affect the collective bargaining agreements reached between it
and unionisable employees of the sector.
“Appointing risk and responsibility goes with the
higher levels of management who are not covered by the CBA,” said KBA’s
chief executive Habil Olaka.
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