RBI Governor D. Subbarao has done well to highlight a major problem in the banking sector. His request to close the gap in the number of high-profile compensation paid by public and private banks deserves a broader discussion that should go beyond the obvious. The fact that the votes of the Chairman of the State Bank of India are only a fraction of the findings of the heads of the largest private banks is widely known.
Indeed for many media outlets, these are the factors highlighted even though the RBI Governor has raised the issue of compensation in the broader context of encouraging and retaining bank executives in the public sector, lest they move to the private sector.
There are some very important problems. The massive disparity in wages at the highest levels is simply an indication of inadequate human resource management practices by state-owned banks. Policies may have been adequate when public sector banks did not face competition. Lower consideration, power of balance, and the like are undoubtedly the right goals, but the problem becomes so important that some of the social goals of the PSBs can be underestimated.
And, with such a trend, high pay in the entire financial sector, indeed in the entire economy, is a matter of course and not just for HR people. It is no longer possible to encourage young people to stay and have the opportunity to form community banks.
Second, the fragmented pay gap has led to negative perceptions about the quality of banking services. The highest-paid private bank executives appear to be performing better than their public sector partners. That was a myth that was first carried out by foreign banks and continued by the next-generation private banks that came into the 1990s.
According to V. Janakiraman – who in his 38 years at the public sector bank rose to the position of CEO of SBI and was later asked by the RBI to transform Centurion Bank – even the PSB’s mid-level job has a greater chance of banking than other senior private bank executives. Indeed the various tasks the PSB manager is called to perform cannot be compared to the rest of the bank. Unfortunately, this is not reflected in their compensation pockets and therefore, in public opinion about them.