Exploring Differential Pay in PSU Banks: Is My Approach to Performance-Linked Pay on the Right Track?

Hey people,

I'm doing my MBA and currently pursuing my summer training in a Public Sector bank. The project is on "Differential Pay Linked to Performance."

Normally, PSU banks have a very structured pay scale wherein every employee gets paid according to these scales. There is no differentiation in the compensation of the employees regardless of their performance. A performer as well as a non-performer is paid the same. But with the recent autonomy given by the government, some large PSU banks can go in for a differential pay system but within the pay scale. Now, my Bank wants me to study the Differential pay existing in companies and in turn develop a model for them.

I've targeted a few private organizations and some private sector banks, but it is very difficult to get information regarding the existing differential pay systems, especially in private banks. :roll:

Simultaneously, I've studied the current performance appraisal system in my Bank and, keeping in mind their appraisal system constraints, I've decided to develop a model only for the branch heads as they have quantifiable business targets and specific KRAs. Likewise, I've started collecting data from some branch heads about their views and what they would want to incorporate into a differential pay system.

Just want an opinion if my approach is right and if anyone has any ideas on how I can get information about performance-linked pay systems at private banks.

Thank you,

Anjali

Anjili,

This is a tragedy within most of our Public Sector Organizations, where employees are given increments or pay raises irrespective of their performance. Good workers and below-average performers are treated equally in terms of salary if they are working within the same pay scale or pay group.

What you need to do is to analyze whether all tasks are quantifiable or not. In a Pay for Performance System, we have to quantify each task and then assign a grade to it.

I think you are heading in the right direction by focusing on the Senior level initially. This approach will help you shape a reasonable Performance Management System that can be extended down the line.

Saleem

Dear Anjali,

First of all, let me assure you that your approach is correct. A variable (Performance Related) salary structure is possible only when you have defined parameters and benchmarks to measure performance. Organizations often set benchmarks and KRAs, but their feedback and measurement mechanisms are not that strong and are mostly dependent on self-appraisal and review. We need to incorporate systems like 360-degree feedback in KRA appraisals. Sales companies have variable salaries even at the lowest levels and often have the most objective performance measurement systems. Some components with a "range or scale" can be incorporated even at the lower levels, depending on the most critical performance factor for that level. For a bank, it can be in the form of a "Customer Satisfaction Incentive" or "Response time Incentive" for frontline staff, with defined parameters for achievement and measurement.

All the best for your project.

Mohit Mathur

I find your project interesting and also the difficulty in incorporating the information regarding differential pay scales. I can suggest you study the appraisal systems followed in SMEs (small and medium-scale companies), as they don't have any entry restrictions and issues regarding confidentiality. This would render you greater assistance in doing the project with ease.

I am doing a project on 360-degree appraisal and one step ahead of it. If you can email me the Key Result Areas (KRAs) you have taken into consideration, that would help me a lot as I am struggling in designing the parameters. Thank you.

Raaj
Email: raajanand83@yahoo.com

Hi,

Thank you a lot for your replies. I really appreciate them. I am still a little perplexed about how to structure the project. I think only if I study the existing performance pay system in private banks, I will get a clearer picture. Though again, it may not be very prudent to compare a private sector bank system with a public sector bank. Anyways, any info at this stage, I guess, will take me further...

Right now, what I have decided is to shortlist 4-5 KRA's (Key Result Areas) like the total number of deposits, total advances given, reduction in NPA (Non-Performing Assets), customer satisfaction decided by the number of complaints received, etc. As much as possible, I'm trying to keep them quantifiable.

But I still have to decide how should I decide the quantum of the amount to be given as performance pay. I have to keep in mind the approximate cost this performance pay will garner to my bank. Should it be:

1. A certain fixed percentage of profits earned by the bank in the year

2. On an annual basis, the bank can decide what part of the profits should be given as performance pay

3. Based on the performance parameters and the grades received thereof, I can suggest cash figures (for example, if you get Grade 2 = Rs. 5000, Grade 3 = Rs. 7000, etc.)

Or some other scheme. Please give your views...

Another question I have is, since the banking sector is one that requires a team effort for it to be a success, if initially introducing the scheme only for the branch heads will demotivate the other employees or make them indifferent, causing the scheme to fall flat on its face...

I know I'm raving and ranting, but I have so many questions!

As for your query, Raaj, I'd suggest going through some performance appraisal forms of organizations similar to the one you are doing the project for. Moreover, there are loads of books on performance management that will give you a clearer picture about performance appraisal and KRA's. They will have examples of KRA's... You could try the books authored by T. V. Rao.

If you need anything else, let me know.

- Anjali

Hi Anjali,

Nice project and I think you're on the correct path.

I believe it's fine to begin with the seniors for appraisals and any subsequent revisions. As for the juniors, how would you conduct a performance appraisal for a junior clerk? It's not that you can't – you definitely can and have to. Divide the staff into categories and approach it category-wise; that should make it easier, I suppose. It's not necessary to start with the seniors; you can choose any category, whether it's cashiers or managers. Conduct a dry run of the performance appraisal on one category, adjust your Key Performance Areas (KPAs) and Key Result Areas (KRAs) for the next, and continue this process. It may be somewhat lengthy, but you will obtain the desired results for streamlining the entire system by consolidating the outcomes.

For managers, the right KRAs would involve NPA, Deposits, Interest Earned, Assets Acquired, Loans Given, FDs Issued, and so on.

Regarding Cashiers, consider Time taken to serve individual customers, behavioral attitude (which can be evaluated by customer surveys), Numerical proficiency, Efficiency with MICR Machinery, Punctuality, and more.

For Front Desk Staff, the focus should be on behavioral and psychological aspects such as attitudes, customer interactions, providing service with a smile, problem-solving, addressing queries, and the time taken to resolve each issue.

Therefore, in general, link each individual or employee category with their behavioral and technical skills to define their KRAs.

Hope this guidance is beneficial.

Chow,

Junaid

Hi Anjali,

In our organization, we have KPA, i.e., Key Performance Areas, where an employee will fill in this KPA for every quarter on his/her own. They will outline what they plan to do in the upcoming quarter, set their goals, and the management will then assess the perceived goals versus the actual achievements. Performance is judged based on this comparison, and incentives are awarded accordingly.

Thanks,
Promila

Hi Promila,

First, I would like to thank you for your reply.

With respect to your query regarding an MBA in HR, please don't get disheartened by the MAT scores. In fact, there are plenty of good institutes that have their own private exams or separate screenings. You could definitely try them (some like Wellingkars have no written tests, only GD and PIs). One such option being TISS (as you are interested in HR). However, I must warn you, you'll have to start your preparations for TISS very soon.

If you are based in Maharashtra, you could try CET. You have plenty of time to prepare for it (if I've got it right, it's post-April).

All the very best. Let me know if you need any more help.

Warm regards,
Anjali

Dear Anjali,

I have some reservations about the practical implementation of Performance Linked Pay. I have also posted the same on this site. You can go through it if it will be of any help.

Regarding performance in the Banking Sector, I believe that with the Regulatory Authorities in place and the social obligations (e.g., Rural Schemes) our PSU Banks carry out, I don't think it is advisable to link Performance to Pay for PSUs.

Many people start comparing PSU Banks with Private Sector Banks. I feel it is not fair because of the following reasons:

1) Look at the difference in the Minimum Balance you need to keep for Savings Accounts. Does it cater to our majority customers?

2) Private Sector Banks do not have branches in most parts of rural India, but the PSUs have to operate whether they incur profit or loss because of our Government Policy.

3) Think of the Political influences it has regarding Credit and Debt Facilities like Agricultural Loan, Krishan savings, waiving of Debts, Self-Employment Schemes, etc.

4) You must have come across incidents where Private Sector Banks employ Strong-Arm tactics to get back their loans if the Lender fails to pay. PSUs cannot do that because of their socialistic nature.

5) It is very easy to talk about Performance and Pay when you are dealing with the urban and semi-urban class. But when you have instructions from the Government to give loans to farmers who you know will not be able to pay you back as part of your social or other obligation, the whole concept of performance and pay becomes irrelevant.

6) Last but not least, the Board that determines Pay for PSU Banks has some of the Best Minds of the Country. But while determining the Pay, they have to look at a wide range of factors and not only Profit and Customer base factors that our Private Banks look into.

Regards,

SC

Think of a sector working with all these restraints.

Dear Anjali,

I am an HR professional working in Bangalore. I am also working on developing a performance-linked pay system for my company. The approach that you have taken is 100% correct, but what I feel from your post is that you know what to do but not how to go about doing it. I think the first step in your project should be to define performance in terms of what it means to the people in your company. Have a focus group discussion with the senior and middle management of your company and let them debate and decide the performance definition and performance measures. I would also suggest that you try to understand the performance management system of the company because it forms the backbone of a strong variable pay system.

Well, it would be helpful if you keep me updated about the developments in your project.

Regards,
Ashish
Email: ashishmusaddi@yahoo.com

Hi Anjali,

In recent times, you can see that public sector banks have started implementing the Variable Pay system. Some recent news columns authenticate this, where the VP is being incorporated into the salaries of Branch Managers and above. The objective assessment of performance is relatively easier to perform.

As everybody has reiterated, the success of the VP system lies in the objectivity and transparency levels of the PMS in an organization. Defining performance and, most importantly, the performance measures and matrices are expected to hold the keys to the successful implementation of any VP.

VP can be designed using various components - individual performance, team performance, and organizational performance or a combination of more than one of them. Linking performance and pay with organizational performance will be a difficult task to perform. This requires the integration of individual performance aligned with the organizational objectives.

The following are imperative in a successful VP:

1. What is performance - Definition.
2. How it is measured - Matrices.
3. Who is measuring - Authority (transparency comes into picture here).
4. How performance is differentiated (scales of measuring - objectivity).
5. How pay distribution happens.
6. How employees are communicated.

All the best,

Rajesh B

Hi Anjal,

Your study on this topic is really good. I feel that the differential pay should be linked to the benchmarked parameters in all areas of appraisal, and the pay structure should have a percentage system based on the parameters. This amount should comprise a certain percentage of their salary so that it can be fixed, and on this amount, the differential pay can be calculated as per the parameters. For example, for a salary of $20,000, it would be ideal to allocate 10% or $2,000 (or any other percentage) as differential pay and conduct an appraisal of the parameters to determine the pay for this amount. This kind of structure, along with compensation, would be ideal so that performance can be tracked effectively.

Pradeep Kumar

Saleem,

We should see both sides of the coin and comment on the issue. Why did the Central/state Govt adopt such a type of increment policy? You should think about Indian culture/environment where socio-economic factors are dominant. I think that your idea is very good for Russia, USA, England, etc., where such factors are controlled. In our country, social, regional, cultural, political, etc., factors compel the authorities to make wrong decisions even though they may think it is not good, but they become helpless. Keeping in mind these influential factors, the Govt has made such decisions. In a nutshell, it is the only way in the Public sector; otherwise, influential people will benefit every time.

Note: Other opinions are most welcome against my view. You can write to sidheshwar234185@rediffmail.com.

Regards, Sidheshwar Bangalore 9844586572

Hi there,

You have a hugh task ahead of you and I will share some of my views with you with the thought that this may spark some ideas which will work for you.

Executives graduated from business schools over the past twenty years have been trained to manage by assessing a business in terms of performance metrics. How effective are these management professionals in a business environment lacking these work management tools?

How effective would physicians be in providing patient care if they lacked access to lab tests, x-rays and other tools for diagnosis. What if they had to "guess" the patient's vital signs?

To develop the performance metrics and to develop the performance standards necessary to keep your business healthy requires that the major work functions in every department be identified as to volume and it must relate to time. Most simply stated, WORK NOT MEASURED CANNOT BE MANAGED.

To underscore this crucial issue, pose this exercise to senior managers at your next management meeting:

Take the next fifteen minutes and write down the following information for each department or work unit that reports to you:

• What is the "measure" of work (# invoices files, # holes drilled. # phone calls, etc.)?

• What is the hourly or daily volume?

• How much time is required to complete each unit of work?

Make sure the managers do not try to explain the "process" (the first thing that happens...etc.) of how the work is being done, just the quantities.

Collect the data from each manager. Then ask them to actually gather the hard data from each department or work unit supervisor. The exercise is completed when the two sets of data are compared. The variance involved may illuminate a pot of gold!

Ironically, successful businesses are coping with the demands of the future not with new or more sophisticated theories of management. but by getting back to the basics. They are returning to those ingredients that made the business successful in the first place; QUALITY, SERVICE and EFFICIENCY. All three can be achieved simultaneously only by establishing performance standards and using performance metrics to ensure the standards are being met.

One must also consider the voice of the customer and how both internal and external clients view the performance. Perhaps using a customer score card would assist in determining the performance through the eyes of those who keep the business profitable. There have been many posts on 360 degree feedback which is another thought.My personal view is this is tough to implement unless there is an internal culture of trust, growth and the process can be fraught with dishonesty and pleasing the boss.

Like others I could go on and on expressing my views.The one thing I can say for certain....Pay for Performance will only work when there is support from the top, is supported by strong HR processes and methodology and if new to an organization, treated as a change management initiative so that everyone can reflect on WITFM( what's in it for me).Employee buy in will make or break!

The danger, I think is to treat this initiative as a stand alone.It can not be as all the processes discussed in this forum are critically interlinked and contribute to Human Resources management as a value added business process.

Hope you may be able to use some of my ranting to spark some ideas.

Regards,

Jo

www.jemmconsulting.com

Hi,

It is, in fact, an interesting topic. Usually, the MD/Directors will decide how much to be paid as performance-linked pay, as per the budget. Then the kitty has to be shared. Now HR has to play an important role. How to share - based on performance? If so, what is the gap between the reward for poor performance and good performance? If you have a kitty of Rs. 100 to be shared between A and B, A's performance level is 25% achievement of the target, and B's is 50% of the target. You can now share this Rs. 100 like - A-40%, B-50%, or A-25%, B-75%.

It is HR's work to find out the 'differentiating factor' through discussions and analysis. You can create your formula. Hope you got an idea...

Regards,
Sathya

Dear friends,

In hospitals like ours, how can we measure performance? We can do so in administrative areas, but for medical and paramedical areas, which include treatment and therapy such as nursing, laboratory, pharmacy, physiotherapy, and radiology, where the satisfaction level of the patients differs from person to person and is mostly subjective and qualitative.

In such cases, how can we introduce this kind of system? Can you shed some light on whether any health sector that takes care of inpatients and outpatients (hospitals) does this?

Mangai

Hi everyone,

I'm a PGDM student currently undergoing my summer training on the topic of training processes. I am in need of materials and would like to understand how training calendars are designed. Specifically, I am interested in the training needs analysis process and how training needs are identified.

Please send me any relevant PDF files or materials that could help clarify my concepts. I would be highly obliged.

Hi Anjali,

To develop a variable linked pay, it's important, as suggested by many, that the KRAs be well-defined and based on the goals set and goals achieved. In comparison, the variable component should be paid.

Now, to develop the KRA, it's important to understand the purpose of a particular employee's job.

For example, the branch head's overall job purpose is to deliver profitability for the branch.

One of his KRAs should be based on the profitability of the branch, apart from other KRAs. Therefore, his variable pay should depend on the branch's performance. It's true that branch profitability depends on team performance, but he drives the team's performance, whether well or average, depending on his leadership style. Therefore, his performance should be measured based on branch profitability, regardless of whether it comes through team performance because he is the one who has driven that, right?

This profitability could be transformed into variable pay through a predetermined calculation. For example, a certain percentage increase in branch profit would correspond to a similar percentage increase in the fixed or basic pay of the branch manager.

This approach can be cascaded to other employees. Initially, profit center heads can be brought under the variable scheme, followed by lower grades. This gradual introduction allows for acceptance of the change.

Implementing variable pay requires a robust appraisal system because Variable Pay is directly linked to performance. This shift implies cultural changes in PSUs.

This change also signifies that many individuals would need to improve their performance, aligning with the objectives of Variable Pay.

This write-up is open to scrutiny by all!

Thanks and all the best for your project!

Aanchal

Hello Anjali,

First of all, congrats for taking up a complex project. Your project is the need of the hour in the market now, and your approach has been spot on.

Though I am neither into HR nor into the Banking industry, I would like to pass on the information that I have on the subject.

I am working as Manager- Business Development & International Alliances in a Software firm based in Mumbai. We have implemented a Variable pay structure. The same structure might not help you out, but the approach might.

As you have already mentioned, the 1st step is to find out the parameters/KRAs of the person then plan variable pay accordingly.

I have tested 2-3 approaches. Here are those:

1. The 1st approach is:
- The variable component is only applicable based on cash flow generated.
- Achievement of up to 50% of the target will yield 0% of cash flow generated.
- Achievement of up to 75% of the target will yield 2% of cash flow generated.
- Achievement of up to 100% of the target will yield 3% of cash flow generated.
- Achievement of 100% or above of the target will yield 3.5% of cash flow generated.

In case of banks, this will not work on cash flow. You can devise some other parameters rather than cash flow.

This amount can be given monthly or quarterly.

2. Keep a fixed amount as variable pay. For example, from someone's CTC of 7.2 lacs/Annum, 6 lacs/Annum is fixed, and 1.2 Lacs/Annum is variable.

Whatever percentage the employee will achieve out of his KRAs, he will get that much percentage of 1.2 Lacs.

3. You can also give variable pay out of profits. You can have some percentage of the total profit assigned to variable pay, and each employee can have the respective % of that amount as per the KRAs.

4. This is the one that we planned to do, but did not get good feedback.

Keep 10% of the gross salary as a variable component each month. After the end of the quarter, give a rating for the KRAs. Find out the percentage and give that much out of this variable amount.

For example, Gross Salary- 20k/month, Variable pay- 2k/month. At the end of the quarter, you can pay % of 6k as variable pay as per KRAs. The employee will be motivated to get that whole amount after each quarter if he performs well.

Let me know if this helps you or you need any other help. Feel free to contact for any other information. I can recollect my Project days during MBA :)

Regards,

Debadutta

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