KATHMANDU, April 29: A recent study has concluded that the current structure for determining the salaries of chief executive officers (CEOs) at Nepali banks does not align with their actual performance, raising concerns about long-term risks in the banking sector.
The study, released on the occasion of Nepal Rastra Bank’s (NRB) 70th anniversary, points out that linking CEO salaries to bank assets without considering risk factors has encouraged aggressive loan expansions. Analysts warn this approach could undermine the sector’s financial stability.
The existing salary guidelines, issued 14 years ago during former Governor Dr Yuba Raj Khatiwada’s tenure, cap CEO pay based on either 5 percent of total staff expenses or 0.025 percent of total assets- whichever is lower. However, these guidelines have not been updated despite changes in leadership at the central bank.
According to the study, CEO salaries showed no direct connection with key performance indicators like return on assets (ROA), return on equity (ROE), or financial stability (Z-score). Instead, initial salary structures have continued to set the basis for future increases, regardless of the banks' actual performance.
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The findings recommend linking CEO compensation to a broader set of indicators, including loan quality, portfolio diversification, non-performing loan (NPL) levels, and overall financial health, rather than focusing solely on profits or asset size.
Additionally, the study suggests introducing a system where CEO bonuses are paid only after assessing long-term performance, with provisions to reclaim bonuses if banks incur future losses.
It also recommends that Nepal revise its CEO salary framework to align with international standards set by bodies like the Financial Stability Board (FSB). Current formulas, the report notes, do not meet global benchmarks.
The study, which analyzed data from 19 commercial banks between 2013 and 2023, highlights that salary structures based on asset size have pushed CEOs to take excessive lending risks.
Furthermore, it found that board of directors’ meeting allowances in Nepal are significantly lower compared to other South Asian countries. While the average per-meeting allowance in Nepal is around Rs 10,500, it is much higher in India and the Maldives.
The report calls on the central bank to create a legal framework that ensures better compensation for board members to attract qualified professionals and enhance accountability.
Despite annual disclosures of bank CEOs' remuneration in financial reports, this is the first comprehensive study raising questions about the scientific basis of current salary practices.
