Govt mulls study on pay parity in PSUs with private sector: Official

The salary disparity discourages many top executives from staying with PSUs.

The Centre is considering commissioning a study on salary parity for state-run companies with private sector counterparts ahead of the 2027 pay revision for public sector undertakings (PSUs) to boost competitiveness, a government official said.

“Such demands have been there, and the government is considering it. The study will focus only on PSUs. The government may decide the course of action on the basis of the report,” the official said on condition of anonymity, adding that the study is likely to be commissioned in the current financial year.

The finance ministry will take the final decision on commissioning the study, which is likely to be conducted by EY, the official said, adding that discussions with the consulting firm are already underway.

“Internal discussions in the government have happened on this, but a final decision is yet to be made,” the official said.

The wide pay disparity between PSUs and their private sector peers has often resulted in state-run companies losing their best and most experienced executives to private sector companies.

The chairman and managing director of a PSU may get about Rs 3.70 lakh a month in salary, including performance pay, while the top management in a comparably sized private sector company may earn several times that amount.

For example, State Bank of India chairman Dinesh Kumar Khara took home an annual salary of Rs 37 lakh in FY23, while Sashidhar Jagdishan, the CEO of private sector lender HDFC Bank Ltd, drew Rs 6.51 crore in FY22. Though the PSU Pay Revision Committee periodically revises employee compensation, salaries of PSU executives at senior levels remain significantly lower than their private sector counterparts.

"PSUs are potentially well positioned to drive the India story in the coming decades. However, their competitiveness and ability to innovate will be determined by the talented executives who must be incentivised and rewarded for good performance. There is a direct link between performance and compensation. The move to conduct this study will be of strategic relevance given the need for PSUs to effectively and efficiently translate the national interest in areas of market gaps," Arjun Goswami, Director, Cyril Amarchand Mangaldas, told Moneycontrol.

In August 2016, former Reserve Bank of India governor Raghuram Rajan said the salaries of top-level public sector employees, including the central bank, are significantly below global standards. “One of the problems, of course, is that the public sector overpays at the bottom but underpays at the top. I also feel underpaid,” Rajan said then.

However, a second government official said that all state-run companies cannot be viewed through the same lens, and the study will have to categorise their performance based on profits and capital expenditure plans.

The salary disparity discourages many top executives from staying with PSUs, making it challenging for such companies to retain talent and compete effectively with private sector rivals. This disparity also impacts PSUs’ ability to hire senior professionals from the private sector. As a result, PSUs often struggle to match the innovation seen in the private sector, where better financial incentives drive better performance.

"Managerial pay in PSUs is often seen as a limiting factor for productivity and efficiency. However, data analysis reveals that PSU pay is competitive with private sector peers, especially at junior and mid management levels. The main flaws identified are the flattening of compensation after a certain level, which discourages talent retention and growth within PSUs. While there are competitive salaries and aggressive performance incentives, reforming high-level pay structures and improving the PRP process is necessary to improve the competitiveness of PSUs," Kunal Sharma, Partner, Singhania & Co, told Moneycontrol.