Why public banks should be allowed to decide salary structure on their own

On Thursday, Arundhati Bhattacharya, chairman of India’s largest lender, State Bank of India, highlighted a critical challenge of government banks-the painful difference in wages of bank executives in these banks in comparison with their rivals in privately run lenders.

“Here, 70 percent of the banks are in public sector and they are paid very, very poorly compared to market,” Bhattacharya said speaking at a conference in Delhi.

What is interesting to note here is the fact that the salary of SBI chairman itself is the lowest when compared to even the smaller competitors in private and foreign banks.

Here is the picture: In 2012-13, SBI chairman took home an annual compensation of Rs 23 lakh. As a point of comparison, the annual compensation of Chanda Kochhar, managing director and chief executive officer of ICICI Bank, is over Rs 5 crore. The SBI chairman’s post does come with lots of perks but the job is actually more challenging given the balance sheet size of the bank and its width of operations.

In 2010, former SBI chairman, OP Bhatt famously said he is the lowest paid CEO in the fortune 500 list of companies and he must work after retirement as the pension of SBI wouldn’t alone help to support his family.

It is needless to talk about officers and staff in lower ranks in state-run banks.

The irony is that state-run banks play a critical role by virtue of their sheer market size in India’s Rs 89 lakh crore industry but the salary structure of their employees has least correlation with the kind of business these entities handle.

That would also possibly explain the high attrition rate among the newly joined staff in public sector banks and the rising instances of state-run bank employees falling prey to the evil of bribery.

The attrition rate among fresh recruits has gone up in state-run banks in recent years. These junior officers take up jobs in private and foreign banks since the compensation policy is much more attractive there.

The disparity in the compensation structure has been highlighted as a major concern by former RBI governor D Subbarao and current chief Raghuram Rajan in the past. But neither the UPA nor the NDA governments have acted to address this problem.

The reason for such a big difference in the compensation structure of sarkari banks and their rivals in private sector is simple. Salaries in public sector banks are decided through mutual discussions between the Indian Banks Association, the industry body of banks, and the bank unions once every five years.

Often, there is no agreement between the trade unions and IBA on this, resulting in endless strike calls by bank employee unions, frequently disrupting the operations of banks.

In contrast, salaries of top executives at private sector banks are decided by individual bank boards and shareholders with the approval of the Reserve Bank of India.

Compensation packages to bank officials should not be offered on a uniform basis but should be offered in relation to the size of the bank and performance, which isn’t the case presently. And till this anomaly is rectified, the system will produce more SK Jains.

It doesn’t logically make any sense to offer identical packages to employees across banks with different business size-say a big bank like SBI and small bank like Dena Bank. Also, the performance indicators of individual employees should be taken into account.

Perhaps, time is right for the government to acknowledge this problem and work towards resolving it taking cues from the private sector given the rapid changes witnessed in the banking industry with the arrival of new set of banks.

Individual banks should be given the autonomy to offer deserving compensation to those who employees who perform well. Similarly, no free lunch should be offered to non-performers.

Often, the very concept of a government job comes with the notion of room for complacency at work, whereas this can’t be the same in the tight competitive environment of a private bank. This situation must be changed if public sector banks want to stay relevant in tight competition.

The government, which has time and again, expressed its intent to change state-run banks better-run institutions, should take note of the flawed compensation policy in the public sector banking industry and offer the much needed autonomy to individual banks to decide their own salary structure.