IRDAI has put a cap of Rs. 1.50 crore per annum on remuneration of MDs, CEOs, CIOs, operating officers, sales head and other senior officials.
Simply put, 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 based on performance of the company.
In the 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 asked insurers to formulate and adopt a comprehensive compensation policy and review it annually. Also, insurance companies will have to adopt risk-adjusted method or do quantitative and qualitative judgment to decide the remuneration of MDs, CEOs and WTDs. In fact, insurance companies have been asked to disclose qualitative and quantitative parameters of remuneration of MDs, CEOs and WTDs in their annual reports.
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 compensation will be clawed back from subsequent payouts.
In addition, the insurance regulator has excluded Employee Stock Option Policy (ESOP) from variable payouts. IRDAI said that ESOPs 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 senior officials. Also, they have been asked not to revise remuneration of such officials till the expiry of one year from the date of approval.
Meanwhile, IRDAI has mandated insurance companies to disclose the remuneration of MDs, CEOs, CIOs, operating officers, sales heads and other key officials in their annual reports. The insurance regulator has clarified that incentives should also be a part of this disclosure.
Currently, insurance companies disclose the consolidated salaries paid to all employees. Also, insurance companies disclose compensation of managing directors and whole time directors which typically doesn’t include incentives.
The guidelines will come into effect from October 1, 2016.