After some humming and hawing, the finance ministry has sanctioned performance bonuses for public sector bank chairmen-and-managing directors and executive directors. Chairmen will get bonuses of Rs 0.6, 0.7 and 0.8 mn depending on whether they meet 60-80%, 81-99% and 100% of targets. For executive directors, the bonuses will be Rs0.4, 0.55 and 0.65 million against meeting targets.
I think that the scheme is a bad idea. I oppose it on conceptual grounds, on grounds of implementation and on the ground that selectivity in giving rewards is not in an organisation's interest.
The conceptual grounds: Banks are highly leveraged institutions. We know from finance theory that the existence of debt creates extra incentives for taking risk on the part of management. That's because if a risky bet fails, it's debt-holders who will mostly be left holding the can. It does not make sense to create further incentives for risk-taking through performance-linked bonuses.
Yes, you can create additional incentives for risk-taking provided you are in a position to track the extra risk taken and ensure that capital is provided against risk- as is intended in Basel II. Then, you measure returns on risk-adjusted capital (RORAC). Indian banks are far from that stage. I say: if you can't track the risk that management is taking, don't create rewards for risk-taking.
The implementation grounds: Measuring performance at the best of times is a difficult proposition. The finance ministry proposes a slew of quantitiative parameters (weight of 85%) and qualitative parameters (15%). The quantitative parameters relate to meeting targets. This can easily lead to "gaming" of targets- bank chiefs can set targets that are easily attained. Measuring qualitative parameters such as leadership or customer satisfaction bristles with problems.
It would be much better to measure relative stock performance (relative to the Banking index as well as the market index). It would also be useful to measure improvements in the price-earnings multiple of public sector banks, given that these banks enjoy very low multiples at the moment. The measures proposed by the ministry are unsatisfactory.
Selectivity: I don't know how many public sector banks have performance-based incentives at all levels. Giving performance-based rewards only to people at the top is not the best way to motivate those lower down.
I understand where the ministry and the banks are coming from. Top management compensation in public sector banks is hopelessly out of sync with market realities. But so is compensation at senior management levels. The answer is to revise the compensation structure in banks.
But this means three things. One, public sector banks cannot have a common compensation structure: pay must be related to capacity to pay. Bank unions must accept this and abandon their insistence on banking sector-wide compensation settlements. Two, increases will be related to market compensation for a given position. This means, higher increases in some cases and lower increases in others. Unions must accept this well.
Third- and by no means the least important- the bureaucracy must accept that public sector pay cannot use bureaucrats' pay as the starting point. Bank chairmen may get more than secretaries at the centre.
I hope the Sixth Pay Commission brings some fresh thinking to bear on the subject of pay at public sector enterprises. Otherwise, HRD is going to be a serious problems for PSEs in the years ahead. Maybe that's what some people want? Then, they have a ready excuse for pushing ahead with privatisation, no?
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The economy of the country is booming and India is moving forward very fast to become a super power. The government machinery has to create an atmosphere conducive to this. Special, very attractive and at par with the best in private sector, package is needed for the officers of concerned regulators, departments and ministries. Officers of Ministry of Corporate Affairs, SEBI, and Department of Foreign Trade should be given the best pay and perks. Otherwise the jobs would not attract talented youths, and the economic growth of the country would be adversely affected as a result of that. At present many of the officers of such departments/ regulators are considering quitting. Take the example of M/O. Corporate Affairs. The officers of that ministry are appointed from a cadre called ‘Indian Company Law Service’ (ICLS). The pre requisite qualification for applying foe selection to ICLS is to be a CA, CS, Cost Accountant or Advocate with specified years of experience in company law matters. Many of the presently serving officers are having more than two of the required professional qualifications. In the present scenario where they get huge pay outside how many experienced professionals would opt to apply, for the cadre, which offers a pittance as salary.
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