Tamal Bandyopadhyay: A big step, a small move

The incentive structure for public sector bank CEOs is welcome, but nowhere near enough.

The finance ministry is giving finishing touches to an incentive package for the top brass of public sector banks. Going by the proposal, the CEOs of public sector banks can get as much as Rs 10 lakh as annual bonus and the executive directors Rs 6 lakh. The exact quantum of bonus will be linked to the performance of the top guns.

In the beginning of the financial year, banks enter into statements of intent with the finance ministry on 16 major performance parameters including deposits, advances, net profit, return on assets (RoA), return on net worth (RoNW), earning per share (EPS), capital adequacy ratio (CAR), net interest margin (NIM), cost income ratio, non-performing assets, and advances to agriculture, small-scale industries and other priority sectors. The targets are set in consultation with the boards of the banks. The minimum eligibility criterion for a CEO and the executive director for earning the annual incentive is achieving at least 60 per cent of the targets set in the statement of intent.

Following this principle, the chief of the Chennai-based Indian Overseas Bank should get Rs 10 lakh bonus for 2005-06 as his bank has been able to meet all targets. The CEOs of Indian Bank and Punjab & Sind Bank, too, will get hefty packets as they hit 15 of the 16 targets set. Three other CEOs "" that of Canara Bank, Bank of Baroda and a State Bank of India associate "" will also not be left far behind since they have met 11 of the 16 targets.

If this gives the impression that the public sector bank chiefs will now become a pampered lot, consider the fact that the remuneration of K V Kamath, managing director and CEO of ICICI Bank, rose close to 30 per cent, to over Rs 2.47 crore from over Rs 1.91 crore in 2004-05. Lalita Gupte, ICICI's joint managing director who retires in October this year, received a total remuneration of over Rs 1.88 crore in 2005-06. Kalpana Morparia, the bank's second joint managing director, got Rs 1.36 crore. The bank's deputy managing directors, Chanda Kochhar and Nachiket Mor, received a remuneration of Rs 1.13 crore and Rs 97 lakh, respectively, last year.

Among other private bank bosses, P J Nayak of UTI Bank was rewarded with about 27 per cent rise in salary in 2005-06. Nayak's remuneration, however, was still below the Rs 1-crore mark. His annual package would cross Rs 1 crore this year as his annual basic salary is set to go up by 42 per cent.

HDFC Managing Director Aditya Puri's salary in 2005-06 was Rs 1.3 crore, the same as in 2004-05. However, his basic salary will go up by 25 per cent this year "" from Rs 72 lakh to Rs 90 lakh per annum. Another private sector bank CEO, Shailendra Bhandari of Centurion Bank of Punjab, saw his remuneration rise 22 per cent to Rs 1.62 crore in 2005-06, from Rs 1.35 crore in 2004-05. It will go up further this year. The proposal is to raise his annual basic salary to Rs 96.6 lakh; allowances to Rs 13.8 lakh; leave travel allowance to Rs 5 lakh and variable incentive up to Rs 42.24 lakh. Besides, 2.50 lakh equity shares of the bank will be transferred to Bhandari from the employees trust of the bank. The par value of Centurion Bank of Punjab is Re 1 and it is now trading at around Rs 20. Kamath runs a bank that has an asset size of over Rs 2,50,000 crore (as on March 31, 2006). HDFC Bank's asset base is over Rs 73,000 crore and that of UTI Bank close to Rs 50,000 crore. Centurion Bank of Punjab's asset base is over Rs 11,000 crore.

In contrast, the State Bank of India chairman runs a book close to Rs 500,000 crore. Four other public sector banks "" Punjab National Bank, Canara Bank, Bank of Baroda and Bank of India "" manage assets between Rs 112,000 crore and Rs 145,000 crore each. How much do their CEOs earn? Typically, the chairman of a public sector bank earns about Rs 45,000 per month (Rs 5.4 lakh per annum). His executive director's salary is around Rs 43,000 per month. The chief of State Bank of India gets a couple of thousand rupees more as his salary is linked to the pay scale of a secretary in the government, while other banks' CEOs packages are linked to an additional secretary's pay scale. The executive directors draw the same salary as a joint secretary.

A public sector bank CEO's salary has three components "" basic, dearness allowance and other allowances. The third component normally fetches them Rs 300 per month! In addition, they get a house, free telephone, 100 per cent medical expenses for themselves and 75 per cent for their wife and children. They are also entitled to buy furniture worth Rs 2 lakh during their tenure (for which Rs 500 is deducted from their salary every month) and drive the office car for personal use up to 400 km per month.

It is amazing that despite such a huge disparity at the remuneration level, public sector bankers are still passionate about work and fighting for every rupee of deposits mobilised and credit disbursed with the private bankers. A Rs 10-lakh annual incentive can make a small beginning. At the next stage, North Block must delink a commercial banker's salary from that of bureaucrats and link it to the profitability of the banks which they head. The heads of listed entities should also be given stock options. At the same time, let the ministry be impatient on non-performance. If it wants the public sector CEOs to survive intense competition on the banking turf, non-performers must be sacked and perfomers rewarded handsomely.