Economic Survey 2020 moots performance-linked employee stock options for public sector bank staff

The Economic Survey 2019-20 has made a case for performance-linked payouts in the form of employee stock option plans (ESOPs), despite several failed attempts by public sector banks (PSBs) to popularise the scheme among its employees in the past.

The Survey suggested that ownership would encourage innovation and risk-taking as against conservatism, which is the typical mindset of employees in PSBs.

“Employees can constitute one of the blocks of new owners of PSBs through an employee stock ownership plan (ESOP) that is conditioned on employee performance,” said the Economic Survey released on January 31.

These suggestions come at a time when PSB employees have declared a two-day nation-wide strike on January 31 and February 1, demanding higher pay hikes and five-day workweek among other conditions.

After the government’s approval in 2017, a number of PSBs including Union Bank of India, Allahabad Bank and United Bank of India, tried to raise funds via the issuance of ESOPs but failed to garner much interest.

The weakening financial condition of PSBs over the years and the performance-linked component has acted as a deterrent for employees from opting for the scheme.

However, the Economic Survey stated that enabling employees to own stakes in PSBs would lead to more productivity.

“Given the current flat compensation contracts of employees and the pressures from ex-post monitoring by the vigilance agencies, it is hardly surprising that bank employees of state-owned banks prefer safety and conservatism over risk-taking and innovation. A long-term solution to this problem is enabling employees to own stakes in the PSBs,” the survey said.

It added that ESOPs will help incentivize employees and align their interests with that of all shareholders of banks.

“Ownership by motivated, capable employees across all levels in the organization could give such employees tangible financial rewards for value enhancement, align their incentives with what is beneficial to the PSB, and create a mindset of enterprise ownership for employees,” the survey said.
The Survey also said that part-ownership would reduce agency problems.

“This is because employees who own shares are incentivized to increase market value of equity since their direct compensation depends on share values,” it said.