Performance, public-sector banks and George Bernard Shaw conundrum

The challenges before the performance-linked incentive structure of senior PSB executives

India’s public sector banks (PSBs) are facing a unique challenge. A six-decade-old industry-wide wage pact is competing against a new performance-linked incentive (PLI) scheme.

 

Meant for senior bank executives, created by the Department of Financial Services (DFS) of the ministry of finance and the Indian Banks’ Association (IBA) – a bankers’ lobby – the PLI scheme at the moment is under judicial scrutiny in the Delhi High Court.

 

Since 1966, wage agreements in PSBs, covering all employees up to scale VII officers (general managers), have been crafted through industry-level negotiations between bank trade unions and the IBA.

 

The 11th bipartite settlement, finalised in 2020, introduced the concept of PLI, based on operating and net profits of the PSBs.

 

The 2020 PLI framework was linked to each bank’s year-on-year (Y-o-Y) growth in profit. If the Y-o-Y operating profit growth is less than 5 per cent, no PLI is paid; between 5 and 10 per cent, five days of pay (basic and dearness allowance); between 10 and 15 per cent, 10 days’ pay; and above 15 per cent, 15 days’ pay. This scheme was applicable to the entire workforce, up to scale VII.

 

The incentive structure for whole-time directors – executive directors (EDs), and managing director and chief executive officers (MD & CEOs) -- has always been excluded from such bipartite settlements. It is linked to government pay structure; the CEO’s compensation is generally benchmarked against the salary of an additional secretary.

 

For them, the finance ministry had introduced a PLI in February 2012, based on 12 quantitative parameters. The amount was small but the arrangement made the PSB bosses smile. Once the Reserve Bank of India (RBI) started the cleansing process of banks’ bad assets in 2015, the scheme vanished into the blue.

  The government revised the PLI scheme for whole-time directors in 2019. The eligibility criterion was based on a bank’s return on assets (must be positive) and net non-performing assets (not more than 1.5 per cent). Very few banks were eligible for that.

 

In 2024, it was revised again and included senior executives from scale IV (chief managers) besides the whole-time directors.

 

While the old incentive structure of a maximum of 15 days’ basic pay and dearness allowance, part of the industry-wide wage pact, continues for employees up to scale III, the new scheme ramped up the incentive structure 24 times – up to 360 days’ basic and DA – for the top management.

 

The trade unions are opposing any system that caps PLI for about 94 per cent of bank employees at 15 days’ pay but allows senior executives (6 per cent) to earn up to 360 days of basic and DA. After all, banking operations are primarily executed on the field, where employees up to scale III (senior managers) engage with customers, they argue.

 

Communicated through a letter in November 2024, the new PLI scheme is in line with the scheme in central public sector enterprises (CPSEs), recommended by the Third Pay Revision Committee.

 

At CPSEs, the pool for incentives is capped at 5 per cent of the previous year’s net profit before tax. The payout depends on three components – company performance, team performance, and individual performance rating – and varies between 40-90 per cent of basic pay for middle management and 100 per cent for the MD and chairman.

 

This is applicable across all grades in CPSEs. In PSBs, it is meant for officers from scale IV up to the MD & CEO.

 

The employee and officer unions did not bother about this as long as the bipartite settlement-based PLI for staff up to scale VII was preserved. Now, they argue that the new structure divides workers, “pitting colleague against colleague”, and encourages senior executives to prioritise short-term gains at the expense of broader goals, such as financial inclusion and long-term asset quality.

 

The dispute has been under conciliation with the Chief Labour Commissioner (CLC-Central) since early 2025. After a series of conciliation meetings in November 2025, and January and March 2026, the CLC has suggested that the IBA and the PSBs maintain the current status and amicably resolve the dispute.

 

On 9 March, the CLC directed the IBA to work on the cost differential between the uniform PLI and the new model. It also asked the bankers' body to discuss the unions’ demand with the DFS. The idea is to preserve “industrial peace and harmony” even as the unions threaten to go on a strike if the new PLI scheme is implemented without a consensus.

 

As the DFS is insisting that the PSBs implement the new PLI for officers from scale IV upwards, three bank unions have filed a petition in the Delhi High Court challenging the scheme as arbitrary and discriminatory. They argue that the scheme violates the binding settlement and the principle of equal pay for equal work, breaching Articles 14, 16, and 21 of the Constitution by granting disproportionately large incentives to a small fraction of the workforce against the spirit of reconciliation.

 

At a hearing on 1 April, the Delhi High Court maintained that it was not inclined to pass any interim order but issued notifications to the Union of India and the IBA, and scheduled a detailed hearing on 25 May. The implementation of the scheme will be subject to further orders.

 

Twelve PSBs, which have at least 85,000 branches and 760,000 employees, posted ₹1.78 trillion net profit in FY25. In FY18, their collective net loss was to the tune of ₹87,357 crore. In that year, the gross NPAs were 14.58 per cent and net NPAs 7.97 per cent. By FY25, the gross NPAs had dropped to 2.3 per cent and net NPAs, 0.45 per cent. In FY25, they paid ₹34,990 crore in dividend, out of which ₹22,699 crore flowed into the coffers of their majority shareholder – the government.

 

The CPSE performance-related pay (PRP) structure relies on specific output metrics and asset-base that are easier to track in terms of economic life and depreciation. In contrast, banking profits can be significantly affected by credit risks that may arise years after a loan is granted. This structural difference explains why the RBI has directed banks to shift from an incurred-loss provisioning framework to expected credit loss structure.

 

Unions fear that a short-term, executive-focused PRP incentivises banks to prioritise immediate interest income and fee revenue. It may end up rewarding ‘star’ executives for aggressive and risky growth strategies that can strain the balance sheet later.

 

The argument in favour of the new scheme, on the other hand, is that the compensation structure in private banks is far higher and linked to performance. Higher remuneration will help PSBs attract talent from the market.

 

Variable pay in private banks includes deferred payments, partly paid in non-cash forms like employee stock options plans; there are also clawback clauses that empower banks to adjust, cancel, or recover bonuses later if there is excessive risk-taking or misconduct. The PSB scheme does not have such components.

 

The government can explore one of the three options for the PSBs to break the impasse: A CPSE-style bell-curve PRP model for senior executives along with post-event risk controls and clawbacks; a collective, uniform PLI for all staff; and a hybrid model that combines a base of team-linked PLI with a risk-adjusted component for senior executives.

 

The PSBs, which have been growing their market share after losing it for long, are crucial for credit growth, infrastructure financing, and the success of the government’s flagship programmes.

 

I am tempted to conclude the column with an anecdote. Once a beautiful woman approached playwright George Bernard Shaw with a marriage proposal, saying: “You have the greatest brain in the world, and I have the most beautiful body; so we ought to produce the most perfect child.”

 

Shaw, known more for his intellect than his looks, replied: “Yes, but what if the child inherits my looks and your brains?”

 

Combining “private-sector-style” executive rewards with “public-sector-style” social goals doesn't guarantee a perfect PSB.