Why shouldn’t the SBI chief be paid as much as private bank CEOs?
Every year when bank balance sheets are released in June and July, the issue of difference in compensation of high-level public sector bank (PSB) executives and their private sector counterparts comes to light.
This year is no different. Comparisons are being made between the salary of SBI chairperson Arundhati Bhattacharya and her peers in private sector banks.
Without getting into numbers, it would suffice to say that the earnings of the SBI chairperson was barely 5 to 6 per cent of what her private sector counterparts get.
This divergence in compensation is starker, given the fact that the size of the balance sheet of some of the large private sector banks is not even half of India’s biggest lender. So, working as head of PSU banks means more responsibility and virtually no pay. This divergence has brought forth issues, which our policy makers have conveniently ignored for many years.
The first issue, which needs tackling, is the recruitment policy of PSU banks. Till this basic issue is not sorted out, there is little hope of seeing any sustained improvement in the performance of banks.
There have been dozens of committees to reform the banking sector, but all of them have focused on how to take care of issues like non-performing assets (NPAs) and their recognition and recovery. There has been little focus on how to change the decades-old recruitment policy, which is a big deterrent to attract talent in the banking sector, both at the entry and lateral entry at middle and higher levels. The recruitment policy of PSU banks needs an overhaul. If a bank wants to shift its focus to retail rather than wholesale lending, it should be allowed to recruit from B-schools at a salary, which is competitive with other industries.
This whole notion of recruiting officers through special exams and expect them to become successful bankers, has failed to deliver results in the last 40 years. If that system had worked, PSU banks would have not been losing their market share to private sector banks over the years.
Our policymakers need to understand that five years down the line, technology, which has already changed banking, would disrupt even the credit evaluation and credit disbursement function of banks. As far as the higher-level compensation figure is concerned, the difference in salary level of PSU and private banks is also due to the fact that two components, which are present in compensation of private sector executives, do not exist in the salaries of PSU executives.
First, is the performance incentive and the second is employee stock options. Why shouldn’t the compensation of chairman of a PSU bank be linked with performance of the bank under his tenure?
The performance can be evaluated on, let say, the recovery levels in NPA at the time when the concerned PSB bank chief was in charge. The board can appoint an external agency to vet his or her claim of recoveries.
Also on the assessment radar would be the ability of the top executive to deliver in the key focus areas, which the bank has laid out.
For example, if the bank is making an entry into retail lending segment, it would be important to track the growth of the loan book.
As far ESOPs are concerned, they have proved to be one of the best tools to attract and retain talent, but hardly used by PSU banks. The fact is that ESOPs are not going to lead to cash outflow and depending of their performance, even middle level manager should be allotted ESOPs in a liberal manner.