Law to curb bank executives’ pay perks takes effect

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.

READ: New CBK rules seek to cap salaries of bank executives

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.

Executive pay in the industry has been growing at a faster pace than the total wage bill as banks improve remuneration packages to attract and retain top talent.