When the salary of the chief executive officer (CEO) of a bank becomes a profitable investment, shareholders seem generous in paying rewards to the top executive.
Eastern Bank, a second generation bank that pays its CEO the highest salary among all banks in the country, is an example of how generous rewards to the top executive of a company gives hefty returns to its shareholders.
The Eastern Bank boss, Ali Reza Iftekhar was awarded Tk2.46 crore in compensation last year, which means he got an average monthly remuneration of Tk20.51 lakh during that period, according to the bank.
Meanwhile, the bank saw its net profit rise by 30.10% to Tk400 crore in the same year when compared to the previous year.
While many banks continue to grapple with high non-performing loans (NPLs), Eastern Bank now maintains its NPL ratio within 3% which is well below the tolerable level of 5%.
The strong financial performance is also reflected in the price of the bank's share.
Even though the shares of most banks have remained undervalued in the Dhaka Stock Exchange (DSE) due to their weak financial health, Eastern Bank retains the price of its each share above Tk30.
Iftekhar has been serving the bank as its managing director and CEO since 2007. During his long tenure, the bank has made many remarkable achievements.
It won the "Best Retail Bank in Bangladesh" award by The Asian Banker for consecutive six years (2013-18), "Best Bank in Bangladesh" by EuroMoney for consecutive two years (2016 and 2017), "Best Corporate and Investment Bank of Bangladesh" award by Asiamoney for four consecutive years.
The bank was also adjudged "Best Bank of Bangladesh" by FinanceAsia in 2017 and 2019, and got the IFC Global Award for the Best Partner for Working Capital Systemic Solution and ICSB National Award for Corporate Governance Excellence.
Eastern Bank became the first company in the country to achieve a Ba3 rating from Moody's in 2016. Ba3 is a long-term bond rating provided by Moody's credit rating service and is given to debt instruments that are generally considered speculative in nature.
Iftekhar's banking career spanning over three decades also brought him the "CEO of the Year '' award in 2012 at Asian HR Leadership Award.
He has recently been elected chairman of the Association of Bankers, Bangladesh Limited (ABB) for 2020-21. This is his 2nd term as the chairman of the forum of managing directors of banks.
Mashrur Arefin, managing director of City Bank, said CEOs of banks deserve high remunerations as they have many responsibilities.
CEOs in the banking sector currently get Tk10-20 lakh as monthly salaries which is not that high when compared to the profit of the companies, he argued.
Top executives in other sectors like pharmaceutical, telecom and garments enjoy much higher rewards, he added.
CEOs of banks believe they are still underpaid in consideration of the amount of profit they bring for their banks.
Islami Bank is the largest private bank in the country in terms of profit and deposit size. In spite of making profit in the range between Tk500 crore and Tk600 crore in the last couple of years, the bank is not even in the list of top 10 banks in terms of salaries paid to the CEOs.
The top executive of the bank received Tk1.43 crore as remuneration last year, which was the 14th highest amount of compensation among listed private banks.
The monthly rewards of the bank's CEO was around Tk12 lakh last year, according to the bank.
A recent fall and rise of AB Bank can be an example of how managerial inefficiency can hit a bank's financial performance.
AB Bank, which paid the lowest salaries to its CEO among all banks last year, went through a management crisis in 2018 when the bank experienced its worst performance.
Once a dream workplace for bankers, AB now pays lowest salaries to its employees among banks as it saw a significant downturn in its financial health in 2018.
The bank that once was one of the highest profit-makers in the banking sector with an annual profit of over Tk150 crore made a tiny profit of Tk1.8 crore in 2018.
The bank was downgraded to the "Z" category from "A" category in the stock market in 2017 as it declared no dividend for its shareholders. On the DSE, each share of the bank is currently trading at below the face value of Tk10.
An "A" category stock means the company has declared a dividend of 10% or more for the year, when a listed company fails to declare dividend its shares fall into "Z" category.
The bank experienced a 372% rise in default loans in 2018. However, it saw a magical turnaround in financial health after reshuffling its managerial posts and appointing a new managing director.
The improvement in profitability and reduction in default loans enabled the bank to declare a 5% stock dividend for 2019 upgrading its category to "B" from "Z".
"B" category companies are the ones that declare less than 10% dividend to their shareholders.
Last year, the CEO of the bank was paid an annual remuneration of Tk59 lakh.
Common practice worldwide
Paying a hefty compensation to CEOs is a common practice across the world.
Pay for performance has been the mantra of CEOs of companies in America, according to a report by the Economist – an international weekly newspaper.
Compensation analysts in America justify high compensation for CEOs saying that American firms must pay top dollar for top candidates because they compete in a global market for talent.
They argue that firms have grown more complex and bosses must know how to manage new technologies and the vagaries of globalisation, according to the Economist report.
According to Bloomberg, a research firm, the median CEO compensation at big American firms in the S&P 500 share index reached $14m last year.
Pichai Sundararajan, chief executive officer of Alphabet Inc and its subsidiary Google LLC received a whopping $281m last year which was higher than ten best-paid British bosses together made in 2019.
Covid-19 induces pay cut
However, the ongoing Covid-19 crisis has forced some banks' CEOs to take pay cuts in the country as well as around the world.
The CEOs of City Bank and One Bank faced a 10% salary cut in June.
Mashrur Arefin said some banks have been facing salary cuts but it's for the time.
"We will get back our financial benefit within a year if the banking business rebounds," he said.
One in ten members of the Russell 3000, a broad index of listed American companies, has slashed bosses' salaries in response to Covid-19. They include big airlines (like United and Delta), hotel chains (such as Marriott and Wyndham) and industrial conglomerates.
Many others are planning on reviewing their compensation plans, according to the Economist report.
Global companies are now practicing to give shares to the CEOs to compensate for their pay cuts.
For instance, Hyatt Hotels Corporation, an American multinational hospitality company, awarded its CEO shares after cutting his salary. It gives the CEO an option to get much more than forgone pay if the company's share price rebounds.