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A big problem for Indian PSUs
Fri, 15 Jul Pre-Open

As India Inc starts the June quarter reporting season, several companies have claimed that their margins are lower as compared to the previous quarters. The reason for this is salary hikes. Most companies have offered or plan to offer attractive salary increases and bonus packages to their employees. One reason for this is to arrest employee attrition. Another reason is to reward the employees as times have improved since the crisis of 2009. But at such a time one wonders as to what would happen to the compensation of the PSU (public sector undertaking) employees..

There have been several instances wherein employees of Indian PSUs have expressed their woes. At times with regard to lower compensation and at others with regard to threat of job losses. Wide gap in PSU- private sector pay scales, threat of job losses due to privatization and fewer incentives has ailed Indian public sector units for long. Indian banks in particular have been a victim of this. The fact that markets value them at least at 40% discount to private sector peers is reflective of the sentiment.

This is not to suggest that efficiency levels of public sector companies are low. Even if so, they have improved dramatically over the years. Companies like NTPC and SAIL are producing power and steel at cheaper costs than private sector behemoths. The likes of Bank of Baroda and Punjab National Bank have one of the best interest margins amongst Indian banks. The government banks' revenue per employee doubled in the past three years. Of course this is because their manpower grew by 2% while balance sheets grew in excess of 20% over this period. In fact these companies have been the poaching ground of talent for their private sector competitors. That said the low compensation levels in PSUs remains an issue when it comes to retaining the best talent and improving profitability.

Here again PSU banks are set to be the biggest victim. Nearly 80% of middle management and 50% of junior officers in these entities will retire over the next 10 years. The vacancies will require immediate replacement of skilled staff. And attracting that in competition with the private sector will be a heady task for the sector.

Performance linked employee compensation has been a bane of contention in the West. Particularly, after bankers mis-sold risky derivative products to hike profits and pocket dollops of bonuses. Hence short term performance has come to be considered as a bad metric for pay rises. Ironically, even after such learning, the conservative RBI governor has advocated improved pay scales for PSU executives. He believes that will help PSU banks in India remain more profitable.

We agree that competitive pay scales are necessary to sustain efficiency and talent in Indian PSUs. However, arm-twisting the government with strikes and an attempt to match the private sector may not be the best way out.

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