The Nepal Rastra Bank should not interfere in determining salaries of commercial banks’ Chief Executive Officers. Market forces such as demand and supply for banks’ CEOs should be allowed to determine banks’ CEOs’ salary. The issue of capping executives’ compensation emerged after the global financial crisis beginning mid-2008. Monetary Policy for the FY 2010-11 provided for making necessary arrangement by NRB to standardize and maintain transparency in respect of salary and benefits of Directors, CEO and top level executives of the Banks/FIs.
Accordingly, on November 26, 2010, NRB issued guidelines regulating banks’ CEOs remuneration. The remuneration has been linked to total staff expenses and total assets of the respective Banks. NRB reasoned that the guidelines were formulated to prevent the existing tendency of CEOs to invest in risky assets and to provide loans to inferior quality borrowers just to show their better performance. However, most of the Bankers including myself do not agree with this restriction on the following grounds: Banking industry is one of industries retaining best and brightest personnel in the country even in this difficult situation.
The restriction may force best and brightest people to leave the banking industry and ultimately migrate to foreign country. It will also check expansion and growth of the banking industry. As the CEOs salary depends upon total staff salary and total assets as per NRB’s guidelines, it may result into better managed Banks paying less and other Banks paying less. CEOs may be encouraged to increase cost by either increasing staff cost or by excessive lending or by very imprudent investment. In USA and EUs, restrictions have been imposed only on those FIs rescued by their governments.
However, in Nepal despite the fact that none of the Banks have been rescued by public money, NRB has applied the restriction to all Banks and FIs. The higher salary is justified by the high risk undertaken and higher return delivered to all stakeholders including employees, government and shareholders. Restriction on salary may open other illegal avenues as in the case of our public sector. It is said that actual income of many of the high ranking government officers is many times their legal remuneration.
The Rastriya Banijya Bank and Nepal Bank Limited virtually collapsed despite low salary of their CEOs. If higher salary harms the Banking sector, why the salary of the CEOs of the RBB and NBL was set very high by NRB under financial sector reform program. Therefore, it would be better for the NRB to relax the restrictions and limit its activities within its principle mandate of “maintaining price stability, and external and financial sector stability to facilitate high and sustainable economic growth. ”