Reserve Bank of India Governor D. Subbarao has done well to highlight a serious anomaly in the banking sector. His plea for bridging the wide differences in the quantum of executive compensation packages payable by public and private sector banks deserves a comprehensive debate that ought to go well beyond the obvious. That the emoluments of State Bank of India Chairman are just a fraction of that earned by heads of largest private banks is generally known.
Indeed in much of the media, it is those aspects that have been highlighted although the RBI Governor has touched upon the compensation issue in a wider context of motivating and retaining bank executives within the public sector, lest they migrate to the private sector.
Fundamental issues
There are even more fundamental issues. The huge salary differentials at the top most levels are just a manifestation of the inadequate human resources management practices followed by government banks. The policies might have been adequate when public sector banks did not face competition. It was also possible for them to recruit and retain talented staff, who were looking to serve the development aspects of banking. Whether intended or not, since the 1990s the focus of all banks including the PSBs changed. Bottom-line considerations, strength of the balance sheet and the like are no doubt worthy goals, but the trouble is they become so important that some of the social objectives of PSBs are apt to be downplayed.
Also, with such an orientation, executive emoluments across the financial sector, indeed across the entire economy, are something that are tracked and not just by the HR people. It is no longer possible to motivate young people to stay on and get an opportunity to do social banking.
Secondly, the eye-catching salary differentials at top levels have lead to wrong perceptions on the quality of banking services. The much higher paid private bank executives are perceived to be more efficient than their public sector counterparts. That has been a myth that was first perpetuated by foreign banks and continued by the new generation private banks that came on the scene in the 1990s.
According to V. Janakiraman — who in his 38 years of public sector banking rose to become Managing Director of SBI and subsequently was asked by the RBI to turnaround Centurion Bank — even a middle level PSB employee has far greater exposure to banking than some of the top managers of private banks. Indeed the variety of functions that an average PSB manager is called upon to perform is unparalleled in the banking universe. Unfortunately, these are not reflected in their compensation packages and, hence, in the public perceptions of them.
Media attention
There can be very few who would argue the point that private banks and their heads command a larger share of media and public attention far out of proportion to the business they do.
In this they are no doubt helped by their lifestyles financed by their large compensation packages, in comparison to government-owned banks. Two examples will help illustrate the point.
How well do the private bankers project their technology prowess, especially in the context of financial inclusion. That they have far fewer village branches — normally a disadvantage in the drive towards extending banking far and wide — has been converted into a big advantage as they can highlight their technology prowess. Government banks may do much the same thing but public perception is “Aren't they supposed to do anyway?''
Financing of small and medium enterprises (SMEs) is another area. This area of banking was pioneered by public sector banks but foreign and private banks, which have recently discovered the virtues of an important banking segment, are making it out as if it is their own.
Addressing the divide
Simplistically stead, the divide is caused by government rules restricting public sector pay on the one hand and market forces driving up private banks' salaries on the other. There are legacy issues involved in fixing the pay scales of government bank employees.
For instance, the range between the emoluments of those at the bottom of the hierarchy and CEOs cannot be large. Second, the top executives' pay scales are conditioned by what the government pays its own employees. Private banks, including foreign banks, have no such restriction.
The only way out is to delink the top bank executives' pay scales from the government salary structure. That is a suggestion that will apply with equal force to all government undertakings such as ONGC, Indian Oil Corporation and BHEL. Given the other constraints the public sector managers face — multiple oversights, for instance — at least a higher salary might recompense them at least partially. Private banks have enormous flexibility in fixing executive compensation. A specialist, say, in the dealing room, commands a higher salary than even the CEO.
In the U.S. and other developed countries there has been a growing clamour to rein in the sky-high salaries of private bankers. Too often the incentive packages (the variable portion of the salaries) have encouraged a degree of reckless risk-taking: it is alleged that performance was evaluated on the basis of fulfilment of short-term objectives.
While in western countries, the regulators have not been successful —as bank remuneration has rebounded much faster than the general economy — there have been attempts in India to force private banks to fix the compensation packages of their top executives in a rational manner.
