IRDAI has come out with a draft regulation in which it has proposed to regulate the remuneration of managing directors, chief executive officers and whole time directors.
The insurance regulator has proposed to put a cap of Rs.1.50 crore on annual payout of managing directors and chief executive officers of private insurance companies. That means, insurance companies can only pay a maximum remuneration of Rs.1.50 crore per annum from policyholder’s account. However, insurers can pay higher remuneration to such officials from their own account or shareholder’s account based on performance.
In a draft circular, IRDAI has said, “The authority has not laid down any prescription/guidelines to the insurers on remuneration of MD/ CEO/ whole time director (WTD). In light of the above, it is felt that there is an immediate need to lay down guidelines on compensation of the CEO / MD/ WTD which needs to be kept in view while processing the remuneration application. In view of the above, the authority lays down the following framework on compensation of the CEO/ MD/ WTD drawing upon the global best practice as also the framework in place in the financial sector in the domestic market.”
In the circular, IRDAI has proposed to insurers to formulate and adopt a comprehensive compensation policy and review it annually. Also, insurance companies should adopt risk adjusted method or do quantitative and qualitative judgment to decide remuneration of MDs, CEOs and WTDs.
Insurance companies have been asked to disclose qualitative and quantitative parameters of remuneration of MDs, CEOs and WTDs in the annual report.
The insurance regulator has clarified that remuneration should have two components – fixed and variable. While the fixed portion of compensation should be reasonable, variable payout should be based on the performance of the company under the leadership of MDs, CEOs and WTDs. Also, if variable component is substantial then such a payout should be deferred or extended over a period of at least five years. In case of non-performance of the insurer, such compensations should be clawed back from subsequent payouts. Also, the regulator has excluded Employee Stock Option Policy (ESOP) from these payouts. IRDAI said that ESOP should be reasonable. Also, insurers cannot pay guaranteed bonus to these officials.
Insurance companies have been asked to take prior approval of IRDAI before fixing annual remuneration of the senior officials. Also, they were asked not to revise remuneration of such officials till the expiry of one year from the date of approval.
IRDAI has invited comments and suggestions from all the stakeholders before September 21, 2015.