Whether it is a move to meet competition or just a late reaction, the fact that India?s largest bank, State Bank of India (SBI), proposes to offer stock options to its employees is noteworthy. Public sector monoliths rarely ever do anything to retain the loyalty of their talented employees, much less to align their interests with those of the principal owner?the government, in this case. So far, SBI?s remuneration pattern has been starkly indifferent to the challenge of keeping the brightest managers on its rolls in a sector that easily has the highest private sector salaries.?In fact, it is a wonder that anybody half talented has wanted to stick on with the organisation. In that context, SBI is merely waking up to market reality in rewarding its employees the way they are in the financial sector all over the world.
But will it do the bank much good? The banking sector is expected to be opened up to a new burst of competition in 2010, and SBI has no choice but to shape up well in time for the onslaught (assuming it is not thwarted). The bank has two lakh personnel across some 9,500 branches in 32 countries. The employee stock options plan (Esop) is expected to aggregate up to 0.7% of its capital base, which would mean roughly Rs 526 crore worth of stock allotted to employees. The money that employees stand to gain would depend on the market price when they choose to exercise their option. The important point is the motivation this provides to create value. Esops tend to work especially well in service industries, where quality is influenced heavily by staff morale. It is one thing to notionally own a part of the company you work for as a citizen, quite another to have the right to a sliver of shares that can yield cash. But for the Esop plan to transform SBI, it must be accompanied by performance linkages that do not reward everyone indiscriminately. After all, a big problem is the incentive to be mediocre in the absence of any performance rewards. Surveys reveal that public sector bank decisionmakers are stricken by the fear of error, which results in extreme risk aversion?which is bad for business. Addressing this problem would involve assuring a better payoff to managers who take risks that are calibrated to ensure good returns (and come good too), rather than act just to avoid reprimand (or worse).
