The variable remuneration should be reduced where there is deterioration in the financial performance of the insurer. The deterioration in the financial performance should generally lead to a contraction in the total amount of variable remuneration, which can even be reduced to zero, or in case the misconduct of the CEO/WTD/MD leads to significant losses for the insurer or significant adverse outcomes for its customers or other stakeholders; or fraud, gross negligence or material failure of risk management controls,including serious breach of internal rules or regulations have been observed, regardless of the scale of the damage
Hyderabad:
In line with the Reserve Bank of India’s rules for the banking industry, the insurance regulator IRDAI on Monday, in its draft exposure, has proposed that the post of the managing director (MD) & chief executive officer(CEO) or whole time director(WTD) of a private sector Indian insurance company cannot be held by the same incumbent for more than 15 years.
Thereafter, the individual will be eligible for re-appointment as MD&CEO or WTD in the same insurer, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other applicable conditions, said the IRDA.
During this three-year cooling period, the individual shall not be appointed or associated with the insurer or its group entities in any capacity1, either directly or indirectly.
The IRDA has further proposed that no person shall continue as MD & CEO or WTD beyond the age of 70 years. Within the overall limit of 70 years, as part of their internal policy, individual insurer’s boards are free to prescribe a lower retirement age for the WTDs, including the MD & CEO.
The variable remuneration of a CEO/MD/WTD can be reduced: where there is deterioration in the financial performance of the insurer. The deterioration in the financial performance should generally lead to a contraction in the total amount of variable remuneration, which can even be reduced to zero or the misconduct of the CEO/WTD/MD led to significant losses for the insurer or significant adverse outcomes for its customers or other stakeholders; or fraud, gross negligence or material failure of risk management controls,including serious breach of internal rules or regulations have been observed, regardless of the scale of the damage.
The MD & CEO or WTD who is also a promoter/ major shareholder, can’t hold the said posts for more than 12 years.
However, in extraordinary circumstances, at the sole discretion of the IRDAI, such MD & CEO or WTDs may be allowed to continue up to 15 years.
Fixed pay and perquisites
Insurance companies are required to ensure that the fixed portion of remuneration, as defined in the Income Tax Act, is reasonable taking into account all relevant factors. All the fixed items of remuneration, including perquisites, will be treated as part of fixed pay.
No revision in remuneration shall be permitted till the expiry of one year from the date of earlier approval. b) In case the annual remuneration of the MD/ CEO/ WTDs individually exceeds Rs1.50 crore (including all perquisites plus bonuses etc., by whatsoever name called), such excess shall be borne by the Shareholders’ account.
No remuneration can be paid to MD/CEO/WTDs by any of the promote investor or by the group companies of the promoters’/ investors’ companies.
Insurance companies can’t permit MD/CEO/WTDs to insure or hedge their remuneration structure to offset the risk alignment effects embedded in their remuneration arrangement. To enforce the same, insurance companies should establish appropriate compliance arrangements, said IRDAI.
Perquisites that are reimbursable will also be included in the fixed pay as long as there are monetary ceilings. Contributions towards superannuation/retirement benefits shall also be treated as a part of the fixed pay.
The variable pay can be in the form of share-linked to instruments, or a mix of cash and share-linked instruments. While designing the remuneration arrangements it should be ensured that there is a proper balance between the fixed pay and variable pay.
In case of listed insurers, share based employee benefits should comply with SEBI (Share Based Employee Benefits) Regulations. In case of unlisted insurers, valuation of share price for the purpose of variable pay, should be as per Income-tax Act and the valuation should be certified by a chartered accountant / statutory Auditors/merchant bankers.
The total variable pay shall be limited to a maximum of 300% of the fixed pay (for the relative performance period).
In case the variable pay is up to 200% of the fixed pay, a minimum of 50% of the variable pay should be via non-cash instruments; and in case the variable pay is above 200% of fixed pay, a minimum of 70% of the variable pay should be via non-cash instruments.
It further proposed that the non-executive directors will be entitled to a remuneration of up to Rs 20 lakhs per annum, in addition to sitting fee and other expenses.
“Apart from sitting fee and other expenses, it provides for payment of remuneration commensurate with an individual director’s responsibilities and demands on time, which are considered sufficient to attract qualified competent individuals, in the form of fixed remuneration.
“Such remuneration, however, shall not exceed Rs 20 lakh per annum for each such director excluding Chairman,” it said.
As regards chairman of the board, the proposed guidelines said the remuneration may be decided by the board of directors of the respective company.The non-executive director will not be eligible for employee stock ownership plans (ESOPs).
Prior approval of Irdai will be needed for any allotment of sweat equity to a non-executive director.
Deferment of variable Pay
For senior executives, including MD/CEO/WTDs, in adherence to Financial Stability Board (FSB) Implementation Standards, deferred4 arrangements must invariably exist for the variable pay, regardless of the quantum of pay.
A Minimum of 50% of the variable pay must invariably be deferred over a period of at least 3 years. However, in cases where the cash component is under Rs.15 lakh, deferral of such cash may not be required.
Further, according to the IRDAI, the following may be noted:
(i) Deferred remuneration should either vest fully at the end of the deferral period or be spread out over the course of the deferral period. The vesting of deferral shall not be before one year from the commencement of the deferral period.
The deferral period shall be applicable even if the residual service of CEO/ WTD/ MD is less than deferral period. No requests for waiver shall be entertained by IRDAI.
Share-linked instruments
The details of share-linked instruments granted will also be disclosed in terms of the disclosure requirements stipulated for the financial statements of the insurance companies. Such instruments should be fair valued on the date of grant by the insurer using appropriate method.
In case the shares of the insurance company are offered as ESOPs to Managing Director / Chief Executive Officer / Whole Time Directors, then the same shall be governed by the SEBI’s ESOP guidelines.
Guaranteed bonus
Guaranteed bonus is not consistent with sound risk management or the ‘pay for performance’ principles and should not be part of the compensation plan. Guaranteed bonus should only occur in the context of
Sign-on bonus which can be paid while hiring new staff;
Retention bonus is to be paid as per the board approved remuneration policy under exceptional situations and such retention bonus may be paid only once during the entire tenure of CEO/MD/WTD.
The retention bonus shall be paid over a period of at least two years and not more than 50% of retention bonus can be paid in the first year. However guaranteed bonus will neither be considered as part of fixed pay nor part of variable pay.
Further, insurance companies can’t not grant severance pay other than accrued benefits (gratuity, pension, etc.) except in cases where it is mandatory under any statute.