HRD in banks is more than just pay

Overemphasising pay is an affliction of the private sector. In this respect, as well, a public sector bank must compete by being itself, not by becoming a pathetic clone of the private sector.

At a recent conference on banking, I was asked what the three priorities for public sector banks (PSBs) should be. My impulse was to say that they should simply focus on HRD.

But, then, I happen to be at a business school. I had to sound like to a management guru. I found myself saying with a flourish, “Public sector banks should have three priorities: HRD, HRD, HRD.”
    
I wasn’t being facetious at all. The HRD challenges at PSBs are daunting.

A combination of favourable factors — rapid economic growth, sound regulation and supervision, the inherent strengths of the old guard at the banks, the absence of fullblooded foreign competition — has masked their weaknesses and sustained them thus far.

But banks must not count on a continuous run of good luck. They need people of good quality at all levels to be able to cope with challenging times.
    
Last October, the government constituted a committee to go into the HR issues at PSBs. It was headed by A K Khandelwal, former chairman of Bank of Baroda. The committee submitted its report in June this year. I received a copy last week.
    
The report has some very good ideas but also some flawed ones. The good ideas are about the nuts and bolts of HRD — recruitment, training, career planning, etc.

The flawed ideas are about incentives. Let me focus on the latter because these have the potential to cause harm, if accepted.
    
The committee wants PSBs to introduce performance-linked incentives. Total incentives should not exceed 2% of average net profit over the past two years and it should be limited to the 25% top performers.

The incentive amounts would vary from 30% of annual basic pay at the junior level to 70% at the top executive level. The chairman of SBI should be given an incentive payment of . 35 lakh.

CMDs of other PSBs would get incentives in the range of . 18-25 lakh; executive directors . 10-15 lakh. Stock options should be given to the top 15% performers.
    
The committee’s focus on variable pay is dead wrong. Pay in the public sector certainly needs to be improved. But the way to do this is not to introduce variable pay. It is to improve the basic pay.
    
PSBs are unable to do this because the basic pay of CMDs cannot exceed that of the highest official in government. They are unwilling to do it because they think it would mean a substantial increase in pay across the board, which could be unaffordable.

So, today we have a modest ‘incentive’ system for CMDs and EDs (of up to . 10 lakh or so), which is just a covert means of improving their pay.
    
Variable pay is not the answer to this problem. The problem must be tackled head-on. The government must relax its insistence on parity in fixed pay between government and public sector companies. Salaries of CMDs can be pegged in the range of, say, . 30-50 lakh.

An improvement in wages at the non-executive levels can also be negotiated subject to the officer-to-clerk ratio going up. But the unions must accept a higher disparity in wages between the executive and non-executive levels. Executive pay at PSBs is out of sync with the market whereas non-executive pay is not.
    
Why would a higher fixed pay be better than a variable pay scheme? Because the measurement of performance, difficult even in the private sector, can be a nightmare in the public sector.

Banks operate across widely differing geographies, executives often have to pursue non-commercial objectives. PSBs do not have in place systems that can accurately capture all costs at the branch or product level.

They cannot track a manager’s contribution to return on risk-adjusted capital, which is the only meaningful measure on which incentives can be based.
    
Performance in a bank can be measured only over a long period. Hence, the best way to reward performance is not through annual cash incentives but through periodic promotion. How, then, do PSBs distinguish between performers and non-performers?

There are a number of carrots other than performance-linked pay that can be deployed — accelerated promotion, foreign postings, deputation to subsidiaries (for which period the higher pay at subsidiaries can be made applicable), assignment to a high-quality training programme, a paid holiday with family, etc.
    
There is one thing the public sector must never do in its bid to attract and retain talent and that is ape the private sector. Performance-linked pay will destroy the ethos of the public sector.

Limiting cash incentives every year to a select few will create demoralisation in the work force. Top management will be swamped with complaints and petitions. It is a prescription for paralysis.
    
The public sector must compete by offering a different model, a different lifestyle, one that combines job security, dignity, challenge and pension.

PSBs can also introduce generous post-retirement medical benefits as a tool for retaining talent, as some public enterprises already do.
    
Will these suffice? Can PSBs attract talent? Well, the question has already been answered in a way over nearly two decades of deregulation. PSBs have hugely improved performance.

Attrition is lower than in the private sector. If pay were such a big factor, the PSBs should have been wrecks by now.
    
HRD is more than just pay. PSBs are what they are because of the tradition of hiring probationary officers and creating career paths for them.

This tradition, which was interrupted by a freeze on recruitment through the 1990s, must be restored. The report highlights several other areas that cry out for improvement. Focusing on these can make a bigger difference than variable pay.
    
PSBs badly need succession planning at the top. The game of musical chairs for the chairman’s post must end. Today, executive directors bide their time in the hope of vaulting on to a CMD’s job in another bank.

CMDs hop from a small bank to a bigger bank. Loyalty, continuity in management and an understanding of culture are all disregarded. There must be scope for people within a bank to rise to the top.
    
It is easy to overemphasise pay in HRD. That is an affliction of the private sector. The public sector must not fall prey to it.

In this respect as in others, the public sector must compete by being itself, not by becoming a pathetic clone of the private sector.