State-run banks seek higher incentive ceiling

The public sector banks (PSBs) are stung by the departure of a large number of officers for greener pastures. The managements now want to spend more on employee incentives, to limit the attrition, but are unable to do so because of a government-imposed ceiling on performance-linked incentives. The banks have now asked the government to raise the ceiling from the meagre 1 per cent of net profit to 5 per cent. Under the aegis of the Indian Banks' Association (IBA), they have called for a review of the ceiling as it limits their ability to provide performance-linked incentives.

According to G Sankaranarayanan, senior vice-president, IBA, "A one per cent limit is woefully short for incentivising the bank employees, considering the number of employees and size of these banks. We have pushed for a revision because of the high attrition rate in PSBs."

The PSBs follow an industry-wide norm brokered by the IBA, while salaries offered by the private and foreign banks include a significant variable component linked to performance. The resulting salary differential is as high as 200-400 per cent.

In February 2005, the government had advised banks to consider the grant of performance-linked cash incentives up to one per cent of their net profit. This was with a view to put in place a performance-linked incentive scheme in public sector banks.

According to the existing limit, out of a net profit of say Rs 1,000 crore, a bank can use only Rs 10 crore for giving incentives. The banks can give employee incentives up to 25 per cent of the gross salaries. Considering that the gross salary drawn by a senior-level officer is around Rs 6 lakh, the maximum incentive would be Rs 1.5 lakh. Nearly 700 officers would be eligible for this incentive.

"An increase in the ceiling will not solve the attrition problem immediately. We will at least be able to convince some of them not to shift," said KL Gopalkrishnan, executive director, Corporation Bank.

At the end of March 2006, the combined net profit of the 25 public sector banks stood at Rs 16,538 crore. At the existing limit, banks can set aside only Rs 165 crore for a performance-based incentive scheme for around 7.5 lakh employees. A five per cent limit would allow the banks to extend over Rs 800 crore as cash incentives.

The banks may not immediately utilise the full increase in limits. "We may look to put in place a proper incentive scheme over a couple of years," said a senior public sector bank official.