Why public sector banks are the ideal paymasters

"Major banks should be not only socially controlled, but publicly owned," announced Indira Gandhi on the eve of nationalisation of banks in the Indian summer of 1969. Indian policy making has come a long way since, with three series of banking licenses and now talks of licenses on tap, thanks to the RBI Governor Raghuram Rajan.

However, 46 years after the nationalisation, state-owned banks continue to account for 77 per cent of deposits and 76 per cent of advances of the banking sector. Touted to be the main reason why India's banking sector withered the storms of the global financial crisis of 2009 rather gallantly, the state-owned banks have held their own while foreign banks went in and out of fashion, and Indian private sector banks made steady headway in both quantity as well as quality.

With their performance steadily improving, and as they continue giving their private counterparts a consistent run for their money (no pun intended), what emerges as a bit of a paradox is their ability to compete in the talent market. Given factors ranging from strong unions, ownership and legacy, pay policies at public sector banks have been at a peculiar variance as compared to those seen in the private sector. After all, institutions that make money by dealing in money have always been known to drive employees through money! So how would the state-owned super banks survive?

Usually, it is the large pay gap that public sector banks have with the private sector at top management levels that grabs the headlines. However, scratching beneath the surface reveals that an average public sector bank employee is rewarded competitively, especially considering the wide gamut of benefits that are doled out.

That the PSB attrition number of less than five per cent is significantly lower than banking attrition number of 14.9 per cent, is clearly no matter of coincidence. At 23.5 years, average tenure at public sector banks is four times that at private sector banks (5.85 years). This article is an attempt to explore elements of pay practices in public sector banks which give them a unique advantage as employers, which may remain unseen at first glance.

The pay paradox: debunking the myth

A.    Quantum of pay: With Rs 9.5 lakh per annum, an average PSB employee gets paid about one-and-a-half times higher than an average private sector bank employee. At senior and top management levels, public banks' pay lags significantly with respect to private sector banks. However, these levels account for less than six per cent of the overall headcount of the public sector banks. For majority of the headcount at junior- and mid-management level, the median cost to company at state-run banks is higher than that seen in private sector.

Prima facie, the higher pay at junior management level for public sector banks may seem contrary to public perception. The answer to the gap between this perception and reality lies in the composition of the pay.

B.    Composition of Pay

Across levels of management, benefits and retirals together account for a larger proportion of total pay at public sector banks, as compared to that prevalent in the private sector banks. Combined with relatively higher entry-level cash salaries, the benefits make total pay at public sector banks competitive with respect to private sector banks at junior- and mid-management levels.

Benefitting from benefits Public sector banks continue to offer the standard benefits prevalent in private sector banks like home loans, education loans, club membership provident fund and gratuity. In addition, there is a plethora of other benefits like scholarship for meritorious students, laptops/tablets, subsidised canteens, company car and fuel which are not universally prevalent in the private sector. Plus, there are a host of benefits which truly tilt the balance. We cover five such benefits as examples herein:-

a. Pension-Although not granted to new employees, this accounts for a substantial benefit for older employees. The fact that pension is a defined benefit unlike provident fund (defined contribution) makes it more attractive for the employees.

b. Staff Quarters-Leading public sector banks provide maintained staff quarters at locations across the country. While the value of this benefit is difficult to factor, it is usually higher than the HRA the employee would have received otherwise. Furniture reimbursement is usually provided along with the quarters.

c. Medical Protection-Some public sector banks offer an unlimited medical protection for employee as well as dependents. In addition, the banks actually have arrangements and tie-ups with hospitals across circles for reservation of beds. Some banks extend this facility to pensioners as well, which is perceived as a huge benefit by the Gen X workforce prevalent in these banks.

d.Holiday Homes - At least one public sector bank offers holiday homes at popular hill stations and destinations as a benefit to its employees.

e. Reservation of School Seats - Some public sector banks enter into tie-up with reputed schools at each circle level for reservation of seats for children of the staff. This greatly facilitates the frequent transfers that a public sector employee encounters through his or her career.

Other non- monetary rewards

In addition to the benefits which can be valued in monetary terms, public sector banks provide several non-monetary relational rewards which are uniquely different from the private sector. Four such non-monetary rewards have been detailed out to emphasise their significance in total rewards for a public sector bank employee:-

Job security: Other than on disciplinary grounds, public sector banks have virtually zero involuntary attrition. Compared to 4.5 per cent of involuntary attrition in private banks, job security stands out as a significant non-monetary reward. This policy of job security remained unchanged for public sector banks even at the height of the financial crisis in 2009-10. The private sector on the other hand saw 13 per cent of the organisations implementing a headcount reduction.

Rotation: Imagine a career trail where a bank employee gets to hone his or her skills through stints across foreign exchange, treasury, retail and corporate operations, with experience of working across all zones in India as well as a stint in New York. Sounds tough to implement? Add to that a stint in new business development, as a head of a subsidiary and as a CFO and you will have a well-rounded banker ready for the top role.

This indeed is the career trail of current CMD of a leading public sector bank. Interestingly, such career paths at public sector banks are more of norms than exceptions. In fact, job rotation policy has been institutionalised as a part of career progression, by making certain rotations mandatory for promotions beyond a particular level. Such a policy on job rotation leaves an employee richer both in terms of capability and experience.

Training: Frequent role changes on account of rotation necessitate role based training in public sector banks. Coupled with behavioural trainings, these courses account for a significant non-monetary people investment. A leading public sector bank for instance provided training to over 60 per cent of its officer population in the previous fiscal.

Work-life balance: Public sector banks clearly trump their private peers on this count. Further, they offer a more liberal leave policy as compared to their private peers, especially when accruals and caps are compared. Advantages of distinct pay practices

People advantages of benefits and non-monetary rewards are visible. Compared to cash, they are more difficult to replicate and match by the competition. Further, some lifestyle benefits like club membership or staff quarters in prime locations are difficult to 'cash out'.

Also, non-monetary benefits prevalent in public sector banks like liberal leave policy and job security help create a sense of belonging.

It may be argued that benefits, though desirable, may not be the most cost-effective way of delivering compensation. Three illustrations show that benefits can actually help lower costs for the employer:-Cost advantages of distinct pay practices

The Scale Advantage - As mass employers, bank can procure/administer benefits for the employees at a fraction of a cost that the employee would have to pay as an individual.

Take the example of, say, holiday homes: the annual cost of operating holiday homes for one public sector bank is less than Rs 1,500 per eligible employee. A private holiday resort membership for an individual would cost a significant upfront amount in addition to annual charges. The increment advantage: A total rewards structure leaning more on non-monetary rewards ensures that the total cost to company increases at a rate slower than cash increments. This is because spends on non-monetary rewards need to go up by the same amount.

The tax advantage: The tax rules corresponding to costing of certain perquisites enable significant tax savings. Needless to say, non-monetary rewards like training and paid time off are not taxed at all. These cost advantages, along with the obvious people advantage of increased engagement, sense of belonging and employee welfare help make benefits a strong differentiating factor for public sector banks.

Pay practices-related challenges

Benefits administration: Administering benefits in public sector banks involves significant effort, bandwidth and time. One public sector bank has over 30 different policy documents governing benefits. Further, given the large headcount, even the exceptions and special cases for these policies can run into thousands.

Automation of benefits administration coupled with use of third-party administrators can help overcome this challenge.

Flexibility: A rupee received by an employee in the form of cash may be valued more than a rupee received as benefits, simply because cash offers the employee a choice to spend it as per her preference. This challenge can be partly overcome by offering a flexible benefits basket, where an employee can allocate a fixed budget to the benefits he or she values most.

Pay for performance: A rather socialist approach to pay has ensured that there is little incentive for higher performance in public sector banks. On the other hand, approach to job security has ensured that there is little disincentive for non-performance. The absence of both carrot and stick did create an unenviable challenge of performance management for public sector banks. However, positive changes on these fronts are evident with leading public sector banks introducing robust performance management and variable pay plans.

Communication: Relational elements of total rewards like benefits and non-monetary rewards are less visible than cash. An employee may therefore not always value and appreciate their due worth. Communication of relational rewards as important and valuable element of total rewards is essential to help employees understand its value.

The king's new council

The question that still crops up time and again even in the backdrop of a changing people and pay paradigm ' Is cash still the king' when it comes to the most impactful reward mechanism? Perhaps, yes. It will remain to be.

However, cash alone may not conquer the war for talent that both new-age as well as traditional companies find themselves enmeshed in. There are many other non-monetary rewards that can and have created an impact across levels. This is what the public sector banks also vindicate.

Due to differences in business imperatives and nature of ownership and cost constraints, some of the pay practices may not be replicable for private sector banks. The study of pay practices at public sector banks offers three irrefutable lessons for employers across the board.

First, it establishes that well designed total rewards practices can create a unique differentiator for the employer to attract and retain talent. Second, a differentiated approach to pay practices need not necessarily be more expensive. Third, the effectiveness of such a total rewards design can be further enhanced by thoughtfully pre-empting and addressing the challenges faced by public sector peers.

Cash may perhaps never go out of fashion and will continue to be the most visible and virulent reward system that employers use to remunerate their employees. And while cash may be king (of the good times and not so good times) it can certainly work well with its new council of non-monetary rewards to become a formidable fortress that can ring fence top talent and enable companies to remain unscathed as the war for people intensifies in the years to come.

Aditya Nanavaty is a Senior Analyst and Roopank Chaudhary is Associate Partner, McLagan (An Aon Company)

@roopank @AdityaNanavaty