New CBK rules seek to cap salaries of bank executives

Commercial bank executives will have their pay tied to the size of operations they lead under new regulations that are set to come into effect at the beginning of next year.

Banks will also be expected to hold their executives accountable for decisions or actions that have earned them revenues or profits in the short term and for which they have been paid huge bonuses, but later turn out to be loss-making or ill advised, according to the new rules issued by the Central Bank of Kenya.

Also read: Executive pay skyrockets on talent shortage, says PwC

“Compensation should be sensitive to risk outcomes over a multi-year horizon,” says the CBK. “This is typically achieved through arrangements that defer compensation until risk outcomes have been realised and may include ‘claw back’ provisions, whereby compensation is reduced or reversed if employees generate exposures that cause the bank to perform poorly in subsequent years.”

This means that any bonuses paid to executives for decisions and outcomes that later turn out to be harmful to the bank’s operational and financial fitness will be recovered from their pay.

The new rules also discourage banks from signing “golden parachute” agreements with their executives, a move that could make the top positions less attractive and recruitment more difficult.

Golden parachutes are clauses in employment contracts that offer executives sumptuous and sometimes outrageous benefits in the event that their contracts are terminated mid-term.

The compensation comes in the form of predetermined severance pay, a bonus, stock options or a combination of the three.

Banks will also be required to disclose the pay of top executives in their annual reports and show how the compensation was determined, including the criteria used for performance measurement and risk adjustment.

The pay guidelines are in line with global trends that have recently seen governments and shareholders limit executive pay and crack down on the lavish bonus culture that has been seen as driving corporate executives, especially in the financial services sector, to take high level of risks.

In Kenya, industry data shows that the wage bill for executive directors at Standard Chartered, Barclays, Equity, and KCB banks rose by an average of 24.7 per cent in 2011, ahead of the average profits growth which stood at 20.6 per cent.

Consultancy firm PricewaterhouseCoopers (PwC) says the trend cuts across the entire industry making banking executives among the best paid managers in corporate Kenya.

It is this pay gap that CBK is seeking to plug with the new rules although it is unlikely to affect serving executives.

“The remuneration of directors and the chief executive shall be commensurate with the nature, size of operations of the institution and the remuneration offered for similar positions in the market,” the CBK says in a memorandum sent to banks last week.

The directive means that the Central Bank expects the CEO and board members of KCB Group, Kenya’s largest bank by asset valuation, to earn the best pay among Kenya’s 44 banks.

Dubai Bank executives would be the least paid based on the CBK’s market share metric that is linked to assets, deposits, capital, the number of loan and deposit accounts.

KCB is ranked Kenya’s largest bank with a market share index of 14.52 per cent, followed by Equity Bank (9.98 per cent), Barclays Bank (8.9 per cent), Cooperative Bank (8.41 per cent), Standard Chartered Bank (7.74 per cent) and CFC Stanbic (5.1 per cent).

It is not clear how this pay guideline will affect executives of multinational banks like UBA, Habib Bank and Ecobank that tend to pay their executives higher salaries relative to local banks despite having smaller operations.

UBA Bank is ranked 42 among Kenya’s 44 banks, Habib Bank (32) and Ecobank (21). The Central Bank reckons that the setting of executive pay remains the responsibility of boards, but adds that the guidelines are aimed at ensuring that executive salaries are sufficient to attract top talent but not inflated as to affect bank operations.

“The levels of remuneration should be sufficient to attract and retain directors of high caliber, but at the same time balanced against the need to ensure that an institution’s funds are not used to subsidise excessive remuneration packages,” says CBK in the corporate guidelines.

The CBK’s hand in controlling executive pay is expected to become clear during recruitment of new bank managers.

Banks need central bank approval for such recruitment giving the regulator a chance to interrogate the institutions for compliance with the pay guidelines. They could also face tough questions on executive remuneration during the annual licensing review.

Commercial banks are issued licences every year and must receive regulatory approvals before making new board or executive appointments.
Most bankers termed the requirement that lenders match pay with the size of their operations as unviable.

“This initiative is not workable,” said a CEO of a mid-sized bank who sought anonymity in order to speak candidly on the subject. “How much a manager is paid should be an operational decision made by each bank.”

Shareholders will from next year know how much top banking executives are paid because the lenders will be required to disclose in their financial reports the basis for management pay.

“The information should include the decision-making process used to determine the compensation policy, criteria used for performance measurement and risk adjustment, the amounts of remuneration for the financial year and other key information on the incentive and compensation systems,” says CBK.

The increased transparency will help shareholders to better scrutinise the top management and to match pay with productivity, which is currently missing.

The CBK guidelines come in a year that Kenya’s top bankers enjoyed double-digit rise in their salaries as the lenders moved to reward executives they need to stay ahead of the competition.

The executive directors’ pay at Standard Chartered increased by the widest margin to Sh115.5 million in 2011 compared to Sh80.1 million the previous year, reflecting a rise of 44.1 per cent in a year the banks net profit droped 8.5 per cent.

The bank had four executive directors, including chief executive Richard Etemesi, Kariuki Ngari (director of consumer banking), Chemutai Murgor (chief finance officer) and Segun Odusanya who quit in June as director of origination and client coverage and was replaced in January by Robin Bairstow.

Executives at Standard Chartered and Barclays enjoy higher pay than their local bank counterparts because their packages are linked to salaries of directors set by their head offices and talent trends in home countries.

Barclays Bank’s executive wage bill increased 32.3 per cent to Sh86 million from Sh65 million the previous year even as its profit before tax grew at a much slower pace of 11 per cent from Sh10.9 billion to Sh12 billion -- after excluding the one-off gain of Sh3.5 billion in 2010 from the sale of its custodial business to rival Standard Chartered.

Barclays has three executive directors, Adan Mohamed (CEO), Yusuf Omari (CFO) and Nick Mbuvi (corporate banking director).

Equity Bank’s executive compensation bill rose 12.4 per cent to Sh415 million from Sh369 million as its net profit grew 44.7 per cent from Sh7.1 billion to Sh10.3 billion, making it the second most profitable bank after KCB. Equity has 12 executive directors, led by its CEO James Mwangi.

KCB, which led in terms of profit size and growth, had the lowest rise in executive compensation at 11.8 per to Sh70.6 million from Sh63.1 million.
The modest growth in executive pay at KCB has been linked to its decision to trim its executive suite to seven from 22 under a restructuring programme.