PSU bank executives deserve better remuneration: RBI governor

The executive compensation in public sector banks in the country, as is well known, is lower than that in the private sector and there is perhaps a good reason to revisit this, Reserve Bank governor D Subbarao said today.

"If public sector banks are required to compete with private banks on a level playing field, there is a good case for compensating them too on a competitive base," he said, adding that there is also the risk that if the public sector bank compensation is not improved, the public sector may lose talent to the private sector.

The governor was addressing an FICCI-IBA conference on `Global Banking: Paradigm Shift' in Mumbai.

However, he said, while the performance-based compensation of bank executives is typically justified on the ground that banks need to acquire and retain talent, the compensation framework sometimes tend to overlook the perverse incentives it would engender. Bank executives focused too much on short-term profits and compromised long-term interests with disastrous consequences, he pointed out.

The proposed framework involves increasing the proportion of variable pay, aligning it with long-term value creation and instituting deferral and claw-back clauses to offset future losses caused by the executives. 

Since 70 per cent of India's banking sector is accounted for by public sector banks where compensation is determined by the government, and where the variable component is very limited, the proposed reform to compensation structures is relevant in India only to the remaining 30 per cent of the non-public sector industry segment, he said.