TAKE HOME = PERFORMANCE OR ELSE GO HOME!

about 5 months ago
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RBI has mooted a good idea – make a set of rules that link remuneration of bank CEOs with parameters like size of the bank’s balance sheet, bad debts, profits earned and governance record.

Finally, a bright idea which might help banks do better and maybe, just a tad bit maybe, bring down bad debts and improve the balance sheet picture.

It’s a good thing that RBI is finally looking down from the top – unless there is correction at the top management level, how can it percolate to those in the lower rung?

Is this rule going to be applicable to PSU CEOs too? That’s the make-or-break. The moment a pay is linked to the pay scale or other performance parameters, the way business is conducted will undergo a change. Currently, even if the bank drowns in Rs.4000 crore NPAs, the CEO will continue to enjoy his high pay and all the perks. It is like as though there is a complete disjoint between how the bank does and the CEOs responsibility.

The salaries, especially of private sector bank CEOs are huge. In FY18, Uday Kotak was the only head of a major Indian private sector lender to have taken home a higher salary than in the previous year. The managing director of Kotak Mahindra Bank received Rs2.93 crore v/s Rs2.63 crore in FY17. Aditya Puri remains the highest paid banker and his take-home in FY18 was at Rs.9.64 crore.

On the other hand, CEOs of PSU banks are paid much less; so much so that it is silly even comparing! Rajnish Kumar, chairman of SBI, India’s largest bank, who took over from Arundhati Bhattacharya in Oct’17 earned Rs.14.25 lakh in H2FY18 while Bhattacharya had earned Rs,28.96 lakh in FY17.

If one might recollect, some 2 to 2.5 years ago, the then RBI Governor, Rajan had recommended that the pay to the top rung should be lower while high payment and perks should be given to those in the lower band/scales.

There are many who say that it is unfair to go a witch hunt after the CEO’s pay. Those in support say that the pay scales of CEOs have risen 25% only over past five years and this is in tandem with profits of the companies too. The logic for high pay is also in support of a high price being paid for talent and skills. The fear is that if pays come down, it would lead to further brain drain.

Yes, maybe they have point too. But the complaint is not against CEO pay – the ratio indicates that the divide is huge, meaning that employees pay have to go up to lower the gap. And that is where corrective action is required. The disparity between private and public sector CEO salary will always exist, not just in India but all over the world. That cannot be changed but yes, through the salary itself, the PSU CEO can be made more responsible. IF and only IF, political interference, which is root cause of all the evils in the Indian banking sector can also be effectively nipped. Now that is serious Utopian thinking!

To end, this quote from Warren Buffett sums it up; when asked about what he thought about his paychecks to top executives, here is what he said, “Well, I feel fine with people making a lot of money for doing a great job. Yeah. But what I object to is the people that the-- the biggest payday of their life is the day that they leave a company from which they failed, or-- or where they get paid automatically big sums. If you want the shot at the brass ring-- if you want a shot at making tens of millions of dollars a year, if you flop, why in the world should you be making $5 million a year, or $3 million a year? That it's pay for performance is fine. Pay for showing up is not, not with the huge goodbye present or bonuses that are not tied to real performance, I think that's terrible.”

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