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Remuneration rules to foster prudence
The Financial Services Authority (OJK) is completing a regulation on remuneration packages for bankers as part of its efforts to improve good governance in the domestic banking industry
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he Financial Services Authority (OJK) is completing a regulation on remuneration packages for bankers as part of its efforts to improve good governance in the domestic banking industry.
Deputy OJK commissioner for banking supervision, Mulya E. Siregar, said the financial regulator would require lenders to implement good corporate governance (GCG) in calculating remuneration for its executives and staffs.
'We will not set an exact amount of remuneration for bankers, but a guideline to calculate salaries and bonuses,' Mulya said.
Mulya also said the policy was part of the reform measures for local banks to comply with Basel III, the latest version of banking rules applied internationally and developed by the Basel Committee on Banking Supervision, of which Indonesia is a member.
Basel Committee's reasoning behind the rule, he said, was based on the 2008 global financial crisis, that occurred partly due to decisions by bankers to take high-risk initiatives so as to get higher bonuses and wages from their employer.
'The higher the risk they take, the higher bonuses they seek and that eventually drives them to jump into more risky initiatives. This can cause institutions to collapse,' Mulya said.
The draft regulation, which OJK is now working on, titled 'good governance for banks in distributing remuneration based on performance and risks'. The remuneration includes bonuses and long-term incentives for bankers.
According to the draft, banks will be required to establish a committee for remuneration, which supervises directors, commissioners and guidelines in giving bonuses based on performance and good corporate governance.
The rules will also require certain variables, such as performance and risks, to be included during calculation of remuneration.
Scheduled for implementation on Jan. 1 next year for lenders in the BUKU III and IV categories as well as those owned by foreign shareholders, while BUKU I and II banks should comply with new rules as of Jan. 1, 2017.
BUKU I is the lowest category and lists banks with core capital below Rp 1 trillion (US$72.5 million), followed by BUKU II with core capital between Rp 1 trillion and Rp 5 trillion.
The BUKU III category includes banks with core capital between Rp 5 trillion and Rp 30 trillion and BUKU IV ' the highest ' catalogs banks whose core capital exceeds Rp 30 trillion.
Mulya added that the long-arranged policy was expected to be issued in December as the financial regulator was still finalizing a legal review on the draft.
'We have also discussed the rule with bankers, who finally accepted our explanation, as they had previously assumed that we would set a certain quantitative amount for remuneration,' he said.
Mulya further suggested that a more improved standard on calculating remuneration would also help banks to increase efficiency as salaries and bonuses were part of the high-cost components of the banking industry.
The Indonesian banking industry is often seen as one of the most inefficient among its peers in Southeast Asia as it has high average of cost-to-income ratio (BOPO), which measures operating efficiency in banks, due to vast geography.
Higher BOPO means lower efficiency in banks and currently the average BOPO in the domestic banking industry stands around 70 to 80 percent, somewhat higher than the 40 to 60 percent average in ASEAN.
