Performance Linked Pay For Bank Staff

PERFORMANCE LINKED PAY – IS IT A FAIR, RATIONAL AND VIABLE SUGGESTION?---

BY  Sri V Subramanian

Preface

It has been reported in some financial dailies and banking related web sites that Finance Ministry has suggested to the chairmen of the public sector banks that all the bank cannot afford to have a uniform wage structure for their staff, since their financial health and paying capacity differ vastly.  This issue is reported to have been discussed in the meeting of PSU Bank chiefs with Finance Ministry officials on 5^th March, 2014.

 

http://articles.economictimes.indiatimes.com/2014-03-07/news/48005534_1_indian-banks-private-banks-wage-revision

 

http://www.business-standard.com/article/finance/performance-linked-pay-for-psu-bank-ceos-staff-106021601124_1.html

 

http://www.moneycontrol.com/news/fixed-income/performance-linked-pay-for-psu-bank-ceos-staff_202581.html

 

It has been reported that performance linked pay (actually incentives) for good performance in 5 areas namely, 1. Deposit Mobilization, 2. Credit Growth, 3. Quality of Assets, 4. Recovery of NPAs and 5. Net Profit can be considered.

 

I beg to differ with some of the views and suggestions made by Finance Ministry in this regard.

 

Now let us see what this performance linked pay is and how it works in conjunction with a guaranteed minimum pay.

 

1.    Gradation of Banks

It is proposed to classify the banks into 3 categories – A, B and C.  For such classification, aggregate business of the banks as at the end of the last financial year will be the major criterion.  It is followed by other parameters like number of branches/offices and total number of permanent employees.   We may say that in an ideal situation, the banks will be categorized basing on these criteria.

 

S No	Description of the Criterion	Category ‘A’	Category ‘B’	Category ‘C’
1	Net Worth (Rs. Cr.)	10,000 and Above	Above 3,000 and Below 10,000	Below 3,000
2	Aggregate Business (Rs. Cr.)	500,000 and Above	Above 100,000 and Below 500,000	Below 100,000
3	Total number of Branches/Offices	3,500 and Above	1,000 to 3,499	Below 1,000
4	Number of permanent employees	30,000 and Above	10,000 to less than 30,000	Below 10,000

                      

Note: These numbers shall undergo revision once every 3 years.

 

A bank will be categorized in the appropriate class, if any two of the criteria as above are met.  Fulfilment of all the 4 criteria need not be insisted upon.

 

The logic is quite simple and easy to understand.

(a)  If you have more net worth, you have greater ability to pay decent salaries to your staff.

(b)  If you have large volume of business, then naturally applying the principle of scale of economy and marginal costing, your ability to pay more wages is implied.

(c)  If you have more number of branches/offices, it means you have good business and good profits and as a corollary, your staff deserve better wages.

(d)  If you employ more number of permanent employees, it indicates that there is work for everyone on account of robust business growth.  On this count also, your staff need to be paid higher wages (But, this shall not be the ruse for pruning the manpower).

2.    What is Guaranteed Minimum Pay?

Guaranteed Minimum Pay is the minimum assured pay. The wages cannot fall below this level.  Hence, for each position and grade in the bank, quantum of this amount is pre-determined.  Nevertheless, this guaranteed minimum pay may vary slightly between one bank and another.

 

Let us take the fundamental unit as Rs.1,000 only for the sake of statistical comparison.  Now, according to the category of the banks, staff in ‘C’ category bank at the lowest hierarchy and at the entry level will get Rs.1,000.  Then, in ‘B’ category bank, the staff at the comparable position and at the entry level will get Rs.1,050 and in ‘A’ category bank, the staff at the at the lowest hierarchy and at the entry level will get Rs.1,100.  Thus, the guaranteed minimum pay in all these 3 categories of banks will be in the ratio of 1.00 : 1.05 : 1.10 at each rank/grade.

 

3.    Performance Linked Pay

Finance Ministry has proposed to cap the performance linked pay at 1% of the net profit of the bank, basing on 5 areas mentioned under preface.  But, I suggest only 3 efficiency parameters as stated below be chosen for this purpose.

(a)  Aggregate Business per Employee

(b)  Total Income per Employee

(c)  Operating Profit per Employee

 

The rationale behind this is, employees do not have any say whatsoever in branch expansion and large amount of NPAs that are the metamorphosis of the big ticket loans and advances sanctioned by Zonal Office, Head Office and the Board.

4.    Quantum of Performance Linked Pay

Performance linked pay will be available to all full time staff members (regardless of one’s rank/grade) and also to the Whole Time Directors.

 

S No	Efficiency Parameter	Weightage	Most Efficient	Efficient	Less than Average
1	Aggregate Business (Rs. Cr.)	50%	15.00 and above	10.00 to less than 15.00	Less than 10.00
2	Total Income per Employee (Rs. Lakh)	30%	10.00 and above	5.00 to less than 10.00	Less than 5.00
3	Operating Profit per Employee (Rs. Lakh)	20%	15.00 and above	10.00 to less than 15.00	Less than 10.00

 

Note: These numbers shall undergo revision once every 3 years.

Here, Operating Profit is reworked as follows.

1. Extra interest outgo on account of Term Deposits carrying preferential rate of interest (Bulk Deposits) shall get added back to the Operating Profit, to reflect the true picture.
2. Similarly, income foregone/lost on account of large scale concessions in interest and service charges must be calculated as accurately as possible and added back to Operating Profit.
3. Suitable adjustments/corrections are to be made to factor in losses on account of major restructuring of advances.
4. Amount written off upon government/RBI instructions, pending receipt of the money thereof, must be added back.
5. Similarly, incentives/interest subvention passed on pending receipt of the money thereof from the central/state governments must be added back.
6. Finally, any unusual major expenditure that cannot classified as operational loss shall be added back.  For example, unamortised wage arrears or superannuation benefits of past years, unexpected tax claims from the government, large scale reliefs passed on to the borrowers owing to natural calamties etc. will fall under this category.

 As already stated, operating profit vis-à-vis net profit is a more versatile performance parameter to judge the efficiency and for the purpose of determining the basic wages of bank employees.

 Now, using ‘Weighted Average’ method, those banks with a score of 80% and above are eligible for an incentive of 2.00% of their operating profit to be given as performance linked pay to their staff, in proportion to the Basic Pay of each staff. 

 Those banks with a score of 60% to less than 80% are eligible for an incentive of 1.50% of their operating profit to be given as performance linked pay to their staff, in proportion to the Basic Pay of each staff. 

 Those banks with a score of 50% to less than 60% are eligible for an incentive of 1.00% of their operating profit to be given as performance linked pay to their staff, in proportion to the Basic Pay of each staff. 

Those banks with a score of less than 50% are not entitled to any incentive and therefore, their staff do not earn any performance linked pay.

Conclusion
At the cost of repetition, I wish to state that by ‘performance’, the performance of individual staff members is not measured and evaluated, as such process is laden with errors of subjectivity, bias, prejudice and discrimination.  In the absence of standard, uniform and comprehensive guidelines, it is cumbersome and expensive and liable for abuse too.  It is very easy to measure and compare the performance of each bank on the basis of selective parameters as mentioned above.  Moreover, if all the employees get uniform benefit, just akin to once popular bonus, by virtue of overall performance of the bank in which they work, it will lead to contentment and happiness at all levels and it will serve as a good motivator for future performance of the bank too.

 

 

Date:  09-03-2014                                                                                                   V Subramanian