On
“Performance Linked Incentive Schemes of
Schedule Banks”
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CONTENTS
EXECUTIVE SUMMARY
SCHEDULE BANKS
INCENTIVE SYSTEM
REVIEW OF LITERATURE
ICICI BANK
BIBLIOGRAPHY
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EXECUTIVE SUMMARY
The basic purpose of this project is to find out what the various performance based
incentive schemes are and how are these being used by the bankers to improve
their profitability.
Scheduled Banks in India constitute those banks which have been included in the
Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes
only those banks in this schedule which satisfy the criteria laid down vide section
42 (6) (a) of the Act.
ICICI bank is more towards ESOP-Employee Stock Option Plans and Early
Retirement benefits.
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Scheduled banks
Scheduled Banks in India constitute those banks which have been included in the
Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes
only those banks in this schedule which satisfy the criteria laid down vide section
42 (6) (a) of the Act.
As on 30th June, 1999, there were 300 scheduled banks in India having a total
network of 64,918 branches. The scheduled commercial banks in India comprise of
State bank of India and its associates (8), nationalized banks (19), foreign banks
(45), private sector banks (32), co-operative banks and regional rural banks.
"Scheduled banks in India" means the State Bank of India constituted under the
State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the
State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding
new bank constituted under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or
any other bank being a bank included in the Second Schedule to the Reserve Bank
of India Act, 1934 (2 of 1934), but does not include a co-operative bank".
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• State Bank of Travancore
• Andhra Bank
• Allahabad Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
• Indian Overseas Bank
• Indian Bank
• Oriental Bank of Commerce
• Punjab National Bank
• Punjab and Sind Bank
• Syndicate Bank
• Union Bank of India
• United Bank of India
• UCO Bank
• Vijaya Bank
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• Bank of America
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PERFORMANCE LINKED INCENTIVE SCHEMES
The basic purpose of this system is to motivate the employees to work more
effectively and efficiently in order to attain the organizational goals.
As we know that success of any service organization depends upon how strong that
bank is in managing its employees and retaining them over the period of time to
have much better customer and employee relationship.
From the figure it’s clear that for attaining high profitability the banks should try to
have customer satisfaction which can only be attained if the employees are
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satisfied and they work wholly and solely for the banks.
The scheme aims at rewarding the performers. The following officers are eligible
under this scheme:-
• Branch Managers.
(a) the methods followed in measuring the results or output upon which
payment is based
(b) the methods followed in setting wage rates for different classes of work and
To prove that the schemes were often introduced without workers’ co-
operation and consequently met with failure we quote the following:
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‘ .. the practice adopted by several industrial establishments in the Mumbai
region in regard to the preparation of an incentive scheme is to hire an
industrial consultant and to make him work in the establishment under the
cloak of secrecy, until a scheme has been finally prepared. It is only after
several months that the workers of the establishment and their unions begin
to suspect that some scheme is under preparation. Trade union leaders, who
are not employees currently, are not even allowed to watch how standards
have been evolved. Naturally, the workers reject out-of-hand, a scheme
prepared so surreptitiously.’
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initial objective of raising the output was achieved, problems arose
regarding production of sophisticated items and improvement of the quality
of products. The scheme did not function satisfactorily from the point of
view of maintenance of plant and equipment, which, in turn affected output.
The performance of ancillary units like the repair shops was unsatisfactory
because the incentives in these shops were based on the overall steel
production and not the units’ own performance. Thus, the need for careful
preparation for the installation of an incentive scheme.
(a) The incentive scheme should be appropriate to the type of work carried out
and the workers employed.
(b) The reward should be clearly and closely linked to the efforts of the
individual or group.
(c) Individuals or groups should be able to calculate the reward they get at each
of the levels of the output they are capable of achieving.
(d) Individuals or groups should have a reasonable amount of control over their
efforts and therefore their rewards.
(g) Provisions should be made for controlling the amounts paid, to ensure that
they are proportionate to effort.
(j) Set and review specific objectives for each employee periodically.
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Prerequisites of a Good Wage Incentive Scheme
It is, therefore, advisable to ensure that a proper climate exists for the introduction
of such schemes. Some important considerations, which should ordinarily be taken
into account while choosing a particular type of wage incentive scheme, are:
(ii) The objectives of the scheme must be clear, and these should be well
understood at the levels of management and of workers. Certain specific factors
may be selected as the basis for a scheme. Too many factors selected at a time may
make it complicated. The scheme should suit both the particular enterprise and its
workers. At every stage, right from the conception of the scheme to conducting
studies, etc., all the workers and supervisors should be consulted so that they
understand the objectives and benefits of the scheme and may contribute to its
success.
(iii)Incentive schemes should be installed only when production has reached 60 per
cent of the rated capacity. Care should be taken to provide a suitable gestation
mechanism in the scheme on a time-bound basis so that incentive payments at a
lower level of the performance are allowed only for limited time periods. The
quantum of incentive paid at the low levels of production and efficiency should be
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such as to ensure that earnings continuously increase when the targets are raised.
(iv)The scheme chosen should be one which would result in overall economy for
establishment. Incentives should not only increase production but also result in
higher productivity and lower cost per unit; and the gains of increased productivity
should be shared both by the employer and the employed.
(v)The scheme should not be very costly in operation, i.e., it should not involve the
maintenance of very elaborate records, complicated calculations, and too much
material handling.
(vi)The scheme should be based on a work study, and the work contents of various
jobs should be stabilised.
(vii)In principle, each individual or group should be paid according to effort and
productivity, for disparity in earnings may create discontent. Unless the scheme i.e.
well defined, it may turn out that indirect groups may receive higher incentive
earnings than the main production group.
(viii)The scheme should have elasticity to take care of technological and other
changes taking place from time to time and rectify errors that may have crept in at
the time of its initial introduction.
(ix)The scheme should not undermine co-operation amongst the workers. It should
rather stimulate co-operation with a view to achieving the common objective of
increasing the well-being of the business and, therefore, of the workers in general.
(x) Performance standards and norms for incentive payments should be set up at
the average performance level of the employees, i.e., they should not be too high
nor too low. Such performance standards should be set as are within the control of
employees. The adoption of objective assessment procedures and the use of
functional responsibility are to be advocated in addition to such indices of
productivity as wage cost per unit sale, salary savings on inventory, etc.
(xi)To make the scheme effective, a climate should be created in which the
employees feel that the management is fair and just in its dealings with them on
wage incentive matters. For this purpose, mutual discussions and appropriate
management action would be called for.
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(xii)Incentive payment should be made as soon as possible after a job is completed.
Any hastily conceived or haphazardly introduced incentive scheme does more
harm than good. Therefore, it should be introduced after a proper consideration of
the various preparatory measures.
The salesmen are usually given incentives in the form of sales commissions. One
study reported that almost 75% of the organisations surveyed paid salesmen on
some type of incentive basis. This is due to three factors:
There are several incentive plans, each appropriate for different markets, products,
etc., but all plans are basically variations of three types of plans: straight salary,
straight commission, and combination plans.
a. Straight Salary Method: Is not an incentive plan; the salesman is simply paid
on weekly, monthly, or on yearly basis. The advantages of this method are that:
(i) The salesmen know in advance what their income will be; and
(i) This method tends to shift salesman’s emphasis to just making the sale rather
than prospecting and cultivating long- term customer; and
(ii) Pay is not related to results. This lack of relationship reduced salesmen’s
performance.
b. Straight Commission Basis: Under this method the salesmen are paid on the
basis of sates effected, i.e., they are paid for results and only for results. Therefore,
high performance salesmen are generally attracted. But the disadvantages are:
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customers and working to push hard-to-sell items are often neglected,
Under this, salesman not only gets a fixed salary but also a commission in
proportion to the sales effected. The advantages of this method are:
(i)Since salesmen are assured of minimum earnings, they are relieved of financial
worries.
(ii)The company has more control over its salesmen, as there is sizable salary
component in most combination plans. So that it can direct salesman’s activities by
detailing what services and salary component is being paid for.
But the main disadvantage is that salary is not related to performance; only
incentive value of money is being traded off for its security value. Such plans also
tend to become very complicated, and misunderstanding often results in
frustration. In spite of these disadvantages, these plans are widely used with
several basic variations.
d.Salary Plus Commission: Commission Plus Drawing Account where not only
commission is paid but the salesman is also allowed to draw on future earnings to
get him through low sales period; commission plus bonus, where salesmen are paid
primarily on the basis of commission but they are also given a bonus for activities
like slow moving items; and salary plus bonus, wherein salesmen are paid a basic
salary; and also given a bonus for carrying out specified activities.
In many organizations, the managers are paid bonus. There are two types of bonus
plans: one determined by formula (i.e., some criteria like increased sales) and two,
determined by some discretion used in allocation of bonus (i.e., paid on more or
less permanent basis). The bonus plans are generally reviewed annually to make
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them more effective. For top level management, bonuses are generally tied to
overall corporate results. The size of bonus is much higher for top-level executives,
and lower for the lower level executives.
Review of literature
Jacob P. Koshy, (Oct-2008) Performance-based incentive scheme now on a
voluntary basis.
In The study recommended an annual bonus of up to 20% to employees whose
achievements exceed certain targets, which has been accepted by the cabinet.
In the study Traditional Incentive Plans are probably not appropriate for many
smaller companies. However, with a little work and a little creativity, you can
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create an Incentive Program for your small business that really will work
Earlier, the finance ministry had indicated the existing salary structure would not
be tampered with, but the hike would come in the form of incentives.
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budgets for the branch are considered as the most noncontroversial and acceptable
benchmarks. The inclusion of profit as one of the criteria is to ensure that an
official will not be eligible merely on the achievement of budgetary goals in
deposits and advances alone. Profit is a derivative of proper mix of the interest rate
that is paid on deposits and received on advances. Moreover, profitability also
reflects the concern of the Branch Manager/Assistant General Manager in
controlling costs and improving other income by increasing non-fund based
business.
2. All AGMs who are controllers of regions, Branch Managers and Managers of
Divisions who achieve atleast 100% of their budgeted growth in aggregate
deposits, advances and net profit (not applicable to Managers of Divisions) during
the year ending 31st March will be eligible for consideration. Budget and
achievement for this purpose will be defined as quarterly average of deposits and
advances and net proftfor the year.
Further, for Branch Managers and AGMs of regions, there must be at least
75% budget achievement in deposits and advances in all market segments taken
together after excluding the C&I segment. For Branch Managers and Managers of
Divisions the audit rating of their branch should be A or A (+).
Separate criteria regarding audit ratings are stipulated for AGMs of regions. In
addition, there should be at least 50% achievement under the budget for NPA
recovery. The detailed criteria for each category are set out in.
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The incentives are proposed to be given on the following scales:-
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the incumbent will not be eligible.
d) NPA recovery must be at least 50% of the budget of the division.
e) The Managers of the Division must have remained in that position on 31st March
for 9 months or more.
3) For Assistant General Managers of regions, the incentives will be subject to
the following conditions:
For achievement in deposits and advances, budgeted growth and actual
calculated as quarterly average for the entire year are to be reckoned. Year-
end budget achievement in deposits and advances in segments other than
C&I, taken together, must be atleast 75%. For profit, year-end achievement
of the budget is to be taken.
If 10% or more of the branches in their region are having ‘B’ or ‘B (-)’
ratings in the Audit Report Formats as on 31st March or if 25% or more of
the branches of the region audited during the year had slippage in audit
rating or if 25% branches have registered negative growth in P segment
deposits as on 31st March, the AGM will not be eligible. Year-end budget
achievement of the region in deposits and advances in segments other than
C&I, taken together, must be at least 75%.
NPA recovery must be at least 50% of the budget for the region.
The Assistant General Manager must have remained in that position on
31st March for 9 months or more.
AT ICICI BANK
At year-end fiscal 2003, we had 15,179 employees, an increase from 5,063
employees for ICICI at year-end fiscal 2002 and 3,460 employees for ICICI at
year-end fiscal 2001. ICICI Bank had 4,820 employees at year-end fiscal 2002 and
4,491 employees at year-end fiscal 2001. Of the 15,179 employees at year-end
fiscal 2003, 5,558 were professionally qualified, holding degrees in management,
accountancy, engineering, law, computer science, economics or banking.
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Management believes that it has good relationships with its employees. ICICI
Bank has a staff center, which serves as a forum for grievances, pay and benefit
negotiations and other industrial relations matters. ICICI Bank had inducted 2,725
employees of Bank of Madura consequent to its acquisition in March 2001. The
employees inducted from Bank of Madura in the grade of clerks and sub-staffs are
unionized. We have a cordial relationship with this union. We have realigned the
Service conditions and compensation structure of the officers who came to us from
Bank of Madura, which is now comparable with the one existing for ICICI Bank’s
officers.
The financial services industry in India is undergoing unprecedented change as
deregulation gains momentum. Moreover, changing customer needs and rapid
advances in technology are continually redefining the lines of innovation and
competition, thereby providing us with new challenges and opportunities.
To meet these challenges, we have relied extensively on our human capital, which
comprises some of the best talent in the industry. They continue to attract the best
graduates from the premier business schools of the country. They dedicate
significant amount of senior management time to ensure that employees remain
highly motivated and perceive the organization as a place where opportunities
abound, innovation is fuelled, teamwork is valued and success is rewarded.
ICICI Bank’s provident fund has generated sufficient funds internally to meet the
minimum annual return requirement since inception of the funds. ICICI Bank has
also set up a superannuation fund to which it contributes defined amounts. In
addition, ICICI Bank contributes specified amounts to a gratuity fund set up
pursuant to Indian statutory requirements.ICICI Bank offered an Early
Retirement Option to its employees. All employees who had completed 40 years
of age and seven years of service with ICICI Bank (including periods of service
with Bank of Madura, ICICI, ICICI Personal Financial Services and ICICI Capital
Services which were amalgamated with and into ICICI Bank) were eligible for the
Early Retirement Option.
Out of approximately 2,350 eligible employees, approximately 1,495 employees
exercised the Option. The amount payable to these employees was the lesser of the
amount equal to:
• 3 months’ salary for every completed year of service, and
• 1 month’s salary for the number of months of service left.
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The above payment was subject to an overall limit of Rs. 2.0 million for employees
at the level of Joint General Manager and below, and Rs. 2.5 million for employees
at the level of General Manager and Senior General Manager. For the purpose of
this computation, salary included basic pay and dearness allowance but
excluded all other allowances.
The total cost of the Early Retirement Option is estimated to be approximately Rs.
1.7 billion (US$ 36 million). In addition, while we have made provisions for leave
encashment and retirement benefits based on actuarial valuation in accordance
with relevant accounting guidelines, the early retirement of employees will result
in additional payouts over and above the provisions made to date in respect of
those employees. The total retirement benefits in excess of provisions made are
estimated to be approximately Rs. 300 million (US$ 6 million). These costs will be
accounted for in their financial statements.
BIBLIOGRAPHY
WEBPAGES
http://www.livemint.com/2008/10/06221650/Performancebased-incentive-
sc.html
http://EzineArticles.com/?expert=Brian_Bijdeveldt
http://ezinearticles.com/?Creating-Effective-Employee-Incentive-Schemes-
Part-II&id=3693114
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http://www.cgdev.org/section/initiatives/_active/ghprn/workinggroups/perform
ance
http://www.aer.gov.au/content/index.phtml/itemId/730820
http://www.financialexpress.com/news/performancebasedincentivesforpublicse
ctorbankexecs/170897/
http://www.canarabank.com/Upload/English/PressReleases/CanPrMar07.doc
http://www.docstoc.com/docs/22618401/All-Scheduled-Commercial-banks-
%28Including-Regional-Rural-Banks%29/
http://www.cab.org.in/FILCPortal/Lists/Policy
%20Initiatives/Attachments/97/Retrospect-bakg-system-VL.pdf
http://www.federalreserve.gov/newsevents/testimony/alvarez20100225a.htm
http://gujarati.economictimes.indiatimes.com/dirreport.cms?
companyID=8944&year=0
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