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The great divide - The underpaid PSB Chief?

SBI Chairman Rajnish Kumar made the news late last week after a rather quick-witted interaction with the press. On being asked if PSB top brass will also take a paycut in the background of covid, he remarked that he'll have to start living on the road, given how little they are paid.


With a pay of ~30 lpa and government-provided accommodation, you do not need to worry about Mr. Kumar for now, but the stark difference in pay between public and private sector banks compensation is telling. In today's post, we try to understand the quantum of the difference, the impact it is having on attrition and interest and the proposed moves and their downsides.


How bad is it?


Quite bad, to put it mildly! The SBI MD makes ~30 lpa, less than what some of India's top b-school graduates make right out of college, and significantly lower than the private sector counterparts who earn in the crores.


And it is not just SBI which underpays here! SBI, PNB, BOB all pay their CEOs less than 35lpa, while most of India's private sector players pay their CEOs north of Rs 2cr. The private sector chiefs do have good government-provided housing and other amenities, but the difference in pay between the two is still quite telling!


One would expect a large exodus if folks genuinely believed they were underpaid in the public banking space. This however doesn't seem to be the case.


But the people are still coming, and staying!


Let's look at SBI's attrition numbers to get a better idea. While the attrition rate amongst new probationary officers is higher at 6-7%, the overall attrition rate for the firm has remained below 3%! That means that the people who stick with the firm beyond the first few years, tend to stick around for a tremendously long time.


What's more, 2 million+ people give an exam to have a shot at joining the firm every year. The folks who join via this route have to go through 10 rank promotion cycles before they get to Chairman! And yet people keep coming, and people keep staying!


India, for better or for worse, is a country with a tremendous surplus of talent, and public sector banks, for better or for worse are the most stable places in the country where the talent can be deployed. And both of those factors are unlikely to change anytime soon.


The proposed solutions and challenges


One of the most frequently proposed solutions is to have stock linked compensation for public sector bank top brass. This on the face of it seems like an attractive solution but is an extremely bad fit for public sector banking.


Unlike private firms that could work solely towards the goal of shareholder wealth optimization, public banks have other goals to work on as well. Having a branch on the outskirts of a village in Madhya Pradesh for example, could be earnings dilutive, and hence avoided by most private banks, but is something public sector banks have routinely tried to do to enhance banking reach. Similar cases also arise in lending or acquisitions that banks may have to undergo, which are in many cases suboptimal for the bank, but necessary for the country.


A pay rise across the board is also tough to implement, given the rigidity of the pay rise in these banks. While private sector banks are quick to cut pay, and when needed people to manage their costs in a downturn. public sector banks do not have this luxury. Any pay rise therefore would mean a long term fixed cost base - not the most ideal option for a firm.

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