ESOPs to be linked to banks' performance

Framework to incentivise employees referred to RBI for approval

The proposed employee stock option plans (ESOPs) for public sector banks (PSBs) to retain talent will be introduced for select banks that meet the performance criterion of the scheme.

The framework the government has created to incentivise employees has been referred to the Reserve Bank of India (RBI) for approval.

The finance ministry had, in March, agreed in principle to allow PSBs to offer stock options to their employees from 2017-18.

“We have finalised the framework to issue ESOPs after discussing the matter with the Indian Banks’ Association. Banks’ performance will be a key parameter, along with others, for the ESOPs. At the moment, it is with the central bank for approval,” said a senior government official.

According to the proposal, ESOPs will be extended from the level of deputy general manager and additional general manager to the star performers.

The ESOP option will likely be available to banks making profits and doing well in terms of managing non-performing assets (NPAs). Shares equivalent to a certain proportion of net profits are likely to go as ESOPs, according to the official quoted earlier.

NPAs have mounted to more than Rs 6 lakh crore in PSBs.

“A share of net profit could go towards ESOPs, maybe 5 per cent in the case of large banks and 3 per cent in the case of small banks,” he said.

PSBs are facing a talent crunch and the entry of more universal and payments banks is expected to add to the human resource stress.

“ESOPs will give employees a sense of ownership to work towards improving banks’ health,” said the official.

The Department of Financial Services, which has drafted the ESOP framework, will discuss the final contours of the plan with the Banks Board Bureau (BBB). ESOPs are common in the private sector, as companies offer stocks to reward and retain talented employees.

The government is also considering bonuses and other performance-linked packages as suggested by the BBB.

The government, as part of its Indradhanush — a seven-pronged strategy to revive PSBs — had said that ESOPs for top managements were under formulation. Earlier this year, BBB chief Vinod Rai had said that compensation packages across PSBs needed to improve.

“Maybe we are not able to do much about the fixed part of the compensation package but about the variable part we are hopeful that in the next financial year (FY19) we will be able to have bonuses, ESOPs, and other performance-linked incentives,” he had said. 

There could be monetary or non-monetary benefits to make it attractive for professionals to join PSBs, he had said. 

Last year, the then RBI Governor, Raghuram Rajan, made a pitch for offering ESOPs to bank employees. “With PSBs’ shares trading at such low levels, a small allocation to employees today may be a strong source of motivation, and can be a large source of wealth as performance improves,” Rajan said.