The counters in the banking hall of a state-owned bank in India. (Photographer: Sondeep Shankar/Bloomberg News.)

Employee Stock Option Plans By PSU Banks See Mixed Response

An attempt by some of India’s public sector banks to put in place performance-linked incentives via stock options has seen a mixed response.

Four public sector banks are at varying stages of putting employee stock option plans in place. But neither employees nor analysts expect these plans to see much success. This, more than 18 months after the finance ministry gave an in-principle approval for such plans.

Allahabad Bank was among the first to announce an employee share purchase plan in February. As part of the plan, it offered five crore shares at Rs. 53.94 apiece - a discount of 25 percent to the prevailing market price at the time. The bank eventually issued 4.38 crore shares, raising Rs 315 crore in the process. Shares of Allahabad Bank have fallen sharply since then.

Peer United Bank of India had announced an employee stock option at about the same time as Allahabad Bank but has failed to close the issue so far. On August 20, the bank informed stock exchanges that it was extending the availability of the plan till end-August. The bank had fixed the issue price at a discount of 5 percent on the average of the weekly highly and low of the closing share price two weeks prior to the offer.

The bank could not be reached for a comment on the final outcome of the offer.

The other two banks which have board approvals for ESOPs in place include Canara Bank and Punjab National Bank. While Canara Bank plans to issue six crore equity shares, PNB plans to issue 10 crore equity shares through the scheme.

Progress made on these plans has been slow, though.

T N Manoharan, Canara Bank’s Chairman, said that the bank has only received shareholder approval and nothing is final as yet. The management of Punjab National Bank did not respond to calls and emails.

Anil Gupta, who heads financial sector ratings at ICRA, does not expect these schemes to be a run-away success among employees.

Given the weak financial profile of these banks and the outlook of weak profitability, an active interest of the employees in subscribing to these stocks remains unclear, unless they are offered much below the current market price.
Mr. Anil Gupta, Sector Head - Financial Sector Ratings, ICRA Ltd

The Public-Private Gap

India’s government owned banks employ over 8 lakh people across categories. Their job descriptions may be similar to their private sector peers. Their benefits are anything but.

For years, it has been argued that HR reforms are important to improve the performance of public sector banks. Among these suggested reforms has been a move towards performance based incentives, which could help in retaining good talent.

A 2010 committee headed by veteran public sector banker A.K. Khandelwal had noted that issues linked to human resources are the biggest risk to the government owned banking system. The committee had recommended stock option plans for the top performing 15 percent of a bank’s employees.

Subsequently, the Banks Board Bureau (BBB) had also argued for performance linked incentives. Vinod Rai - the first chief of the BBB - had noted that while changing fixed salary structures will take longer, stock option based incentives are easier to offer. In March 2017, the government had given an in-principle approval to stock option plans.

Such incentives could help narrow a very wide gap between salaries of public and private bank employees. While salaries at starting levels do not differ as widely, the compensation gap for senior and specialised employees is enormous.

For instance, the chief of State Bank of India earned Rs 28.3 lakh in cash in 2017-18, while Aditya Puri, the CEO of HDFC Bank, earned Rs 9.56 crore. The gap differs at various stages of a banker’s career but is notable at almost all levels. A relationship manager at a foreign bank can earn four to six times the salary drawn by an employee at the State Bank of India with similar experience in the same city.

With such wide pay gaps, its no surprise that public sector banks often lose good talent to their private peers.

Lalitabh Shrivastawa, who heads research for banking, financial services and insurance (BFSI), at Sharekhan, thinks stock option plans are worth a shot. He believes that ESOPs can help with this problem of employee retention.

The schemes will help PSU banks retain talent and introduce higher accountability. Free float in these stocks is limited and employees may benefit with an improving scenario. Maybe, issues such as the recent bank strike could also be taken care of to some extent.
Lalitabh Shrivastawa, Assistant Vice President - BFSI Research, Sharekhan