New variable pay formula to cover loss-making public sector banks too

The public sector banks (PSBs) registering marginal losses will also give a performance-linked variable pay to its employees, as per the latest salary structure of employees proposed by the Indian Banks' Association (IBA). 

In a first, bank management led by the IBA proposed a performance-based salary increment for all PSB employees - a departure from the past practices of setting a fixed salary hike based on bilateral negotiations. In a meeting held with trade union body United Forum of Bank Unions (UFBU) last Saturday, the IBA proposed a bank-wise salary increase for staff of PSBs based on operating profit and return on assets (ROA) — an indicator of profitability.

Sources said the IBA proposed a fixed salary hike of 6 per cent on the basic pay along with a variable pay component based on performance of individual banks.

PSBs registering a growth in annual operating profit over the previous financial year along with an ROA of up to -0.75 per cent would be eligible to give a variable pay component to its employees, as per the proposal. Not fulfilling any of the two parameters will make the bank ineligible for the performance-linked pay.

A performance matrix has been framed by the IBA and PSBs will be put in six different categories based on their profitability, as per the presentation given by bank managements to the unions on Saturday.

The variable pay will be in the range of 5-30 days of salary of an employee, as per the proposal. The best performing bank will give its employees additional one month salary and the worst performing one will dole out an additional income equivalent to five days of work.

A state-owned bank registering a growth of 15 per cent in operating profit annually along with a positive ROA (suggesting net profit) will be the best-performing lender, giving its employees a variable pay equivalent to one month's salary.

Banks with a negative ROA up to 0.75 per cent (indicating marginal net losses) and registering a growth in operating profit would give its employees additional pay equivalent to five days of salary.

Applying this formula on PSBs for 2017-18 will make only six banks - Bank of Baroda, Bank of Maharashtra, Canara Bank, Vijaya Bank and State Bank of India - eligible for doling out a performance-based incentive to its employees.

Most of the other PSBs, including Punjab National Bank, Union Bank, Corporation Bank, Bank of India, had a negative ROA above 0.75 per cent. While Punjab and Sind Bank's ROA stood at 0.69 per cent, it saw a decline in its operating profit in 2017-18 compared to the previous year, making it ineligible for giving out variable pay to its employees.

A PSB executive said that the managements are consciously aware that the middle and senior management are paid lower compared to their private sector peers and retaining talent in the public sector space becomes a challenge.

"It is a fact that many banks are incapable of paying more but at the same time, certain state-owned banks are capable of paying higher. Due to a common wage settlement, every bank gets settled at a lower level due to weaker banks' low capacity to give a higher wage hike. This formula aims to strike a balance and even those registering marginal losses have been accommodated," said the bank executive cited above.

Banks unions, however, are principally opposed to the idea of a differentiated wage hike among PSB employees. "We wanted an improvement in offer from their proposal to hike salary by six per cent. They instead suggested a new formula for variable pay component. We need to understand it in detail. In any case, in-principle, we are not in favour of linking our basic pay to profits," said C H Venkatachalam, general secretary at All India Bank Employees' Association (AIBEA).

Many private banks already have a component of variable pay in their salary structure. Based on the individual's and bank's performance, employees are offered variable pay in the form of cash or stock-linked instruments along with employee stock option plans.

Last year, the Banks Board Bureau sent a set of recommendations to the department of financial services (DFS) in the finance ministry on a compensation system for the senior management across all PSBs to ensure consistency. It proposed that the compensation should be made up of a fixed component and a variable component - both short and long-term - based on individual and bank-wise performance.

A committee headed by veteran public sector banker A K Khandelwal also recommended, in its June 2010 report on human resources issues in PSBs, that it should consider variable pay as a major component of wages.

New variable pay formula

• IBA has proposed a 6% hike in basic pay along with a new variable pay component based on individual performance of public sector banks 
• Banks showing growth in operating profit from the previous financial year will make the cut for variable pay dole out
• Variable pay will be in the range of 5-30 days of salary of an employee
• Banks with a positive ROA and operating profit growth of at least 15% will be the best-performing lenders