Performance-linked pay plan for PSB staff stuck in limbo

The government is yet to consider offering performance-based compensation to employees of state-run banks more than two years after the Banks Board Bureau first suggested the proposal.
Image used for representational purpose only (File photo | Reuters)
Image used for representational purpose only (File photo | Reuters)

The government is yet to consider offering performance-based compensation to employees of state-run banks more than two years after the Banks Board Bureau first suggested the proposal.
Last week, the Bureau underscored the need for maximising risk-adjusted income and dis-incentivising operational inefficiencies by aligning compensation with the right performance metrics. 

The recommendations were first made by the Bureau to the Department of Financial Services in January, 2017. Currently, PSBs, which follow a compensation structure similar to public sector enterprises, have two separate committees: a Nomination Committee and a Remuneration Committee that determines incentives for employees. But, the process is considered archiac and industry experts believe state-run banks are losing out talent to private lenders, who offer better remuneration based on individual performance. 

Since state-run banks operate in a highly competitive space, unlike the civil services, the Bureau suggested delinking bank employees’ remuneration from that of latter. Instead, it recommended a comprehensive reform in compensation practices for PSBs to ensure that the interests of stakeholders, including management and employees, are aligned to the interests of external stakeholders like customers, tax payers and others. It also suggested appointing a Nomination and Remuneration Committee for each bank with independent members to oversee framing, implementation and review of compensation policy.

The Bureau also wanted the government to introduce performance-based compensation to employees above a certain level, for whom banks choose not to apply the existing industry-wide compensation determining process. Rather, such employees should be offered a fixed and variable component both in short-term and long-term, it suggested. While in the short-term, the variable component could be in the form of Performance Linked Incentives (PLIs) which should initially be restricted to not more than 50 per cent of fixed component, in the long run, variable component could be in the form of Employee Stock Options (ESOs). 

Meanwhile, to qualify for PLIs and ESOs in a year, the Bureau suggested performance tolerance thresholds, agnostic to size, scale and scope of the bank’s business. For instance, it recommended return-on-asset to reward internal capital generation, or a provision cover to maximise inherent strength to absorb expected losses or a proportion of net worth, to ensure adequate capital for unexpected losses or a proportion of stressed assets, to maximise responsible credit underwriting.

Likewise, in order to be mindful of the cost considerations, the operating profit margin should continue to remain above a pre-determined threshold even after factoring in the expenditure on account of variable compensation, it added. However, the total pool of PLIs available to a PSB should be limited to 5 per cent of its annual profit before tax, while the number of ESOs to be granted in any year shouldn’t exceed 0.75 per cent of the bank’s total paid up capital. 

In order to harmonise the difference in paid up capital across PSBs, an “equalisation factor” should be applied. This will ensure that for the same degree of appreciation in the share price of two or more PSBs the ESO benefits that would accrue would be the same. “The PLIs and ESOs to be awarded/granted to each employee should be based on (a) relative performance of a PSB vis–a-vis other PSBs, (b) level of responsibility of the employee and (c) performance of an employee against Key Performance Indicators set for the cohort,” it noted. 

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