Thursday, August 18, 2016

Remuneration to be aligned with identified risk appetite & long term interests

CS Dipanjali Nagpal

Introduction

Compensation packages of employees of financial institutions are designed in a manner to encourage them to align their interest to that of the organisation. Often the structure of packages comprises of bonuses and incentives linked with the short term profitability of these institutions whereas long-term growth and stability is aligned with stock options, pension plans and so forth.

To boost the short term profitability of such firms, employees often indulge in excessive risk taking which jeopardizes the stability of the firm. There is therefore a need to regulate the remuneration practices followed by financial institutions and the reward and incentive schemes offered by them to their employees.

In line with the views endorsed by the G20[1] nations, Insurance Core Principle ICP -7[2] and the Basel Committee on Banking Supervision (BCBS)[3], IRDA in exercise of the powers granted under Section 14 of the IRDA Act, 1999 issued Guidelines on Remuneration of Non-executive Directors and Managing Director /Chief Executive Officer/Whole-time Directors of Insurers (‘the Guidelines[4]’) for all private sector insurers effective from 1st October, 2016. Appointments/ re-appointments made after 1st October, 2016 will be governed by the Guidelines.

IRDA (Remuneration of Non-Executive Directors of Private Sector Insurers) Guidelines, 2016

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