Paying the banker

Delink PSU pay from IAS and monetise all perks

Reserve Bank of India (RBI) governor Duvvuri Subbarao has once again spoken the difficult truth. This time on the issue of the pay and compensation given to executives of public sector banks. Coming, as these views do, not just from the governor of the central bank but someone who belongs to the hallowed Indian Administrative Service (IAS) and one who has been Union finance secretary, they must be taken seriously. The governor is right to draw attention to the fact that in a highly competitive market for talent, public sector banks, indeed most public sector firms, are constrained from offering better pay to talented executives because of governmental restraints. The starting point of this problem is the unwritten rule that guides all government and public sector compensation that no chief executive officer of a firm or head of a government-funded institution should get a salary higher than that of his equivalent in the IAS hierarchy. Thus, a bank chairman or a university vice-chancellor, or indeed the director of an Indian Institute of Management (IIM) or Technology (IIT) is not allowed to draw pay in excess of that of a secretary to the Government of India. The pay of an IAS officer also defines the bar for other government services, including the defence services.

To overcome this barrier, most PSUs and other services have given themselves perks that enable their institutions to compensate them in other ways — housing, company car, entertainment allowances, and such like. Thus, the perks of a public sector chief or senior defence staff may more than compensate them, compared to the pay and perks of their equivalents in the IAS. Thus, one simple way in which this entire issue of public sector pay can be handled is to monetise the compensation of both civil servants (Lutyens’ Delhi housing, for example) and public sector executives, and estimate what may be dubbed “cost to taxpayer” — CTT — and bring out the real attractiveness of the jobs concerned. A public sector bank chief who gets company housing, fully furnished and with peons and security guards thrown in, in a plush south Mumbai locality would have much less to complain, looking at the pay package of a private sector executive who may have to pay for all that.

Governor Subbarao was right to draw attention to the threat of the flight of talent from the public sector, indeed even from the civil services, to the private sector. The government cannot respond to this challenge purely monetarily, because it does not have the fiscal means to do so. One way in which it can be helpful is, in fact, to respect public sector autonomy. Nothing irritates a senior PSU executive, a university vice chancellor or even an army general more than being bossed around by a joint secretary in the ministry concerned, in the name of Parliament and public accountability. Greater managerial autonomy, and the dignity associated with it, is itself a perk, and one that cannot be monetised. But no administrative system can be run based on the presumption of good behaviour of those in authority. There is, then, no alternative to curbing that authority. One way in which this can be done, without reducing the element of accountability to Parliament and government, is to, in fact, offer better financial compensation. In short, more money for less power!