Is managerial pay really limiting efficiency of India's PSUs?

The classic belief is that managerial pay tends to be a great limiting factor for government owned companies in India (PSUs) to become more productive and efficient. (Shutterstock Images)

The classic belief is that managerial pay tends to be a great limiting factor for government owned companies in India (PSUs) to become more productive and efficient. The argument essentially rests on the twin beliefs that since PSUs do not offer competitive compensation, their ability to attract the best talent from the market is limited and on top of that since performance based pay is missing in these companies, so employees rarely feel motivated to drive for higher growth or performance.

The point that I wanted to highlight is that this entire argument on pay being a limitation does not stand the test of a data based analysis. Firstly, PSU pay is very competitive against their private sector peers, and in some cases even better, till the mid management levels. Although above that level, compensation levels in the private sector starts climbing fairly steeply. Secondly, PSUs tend to have a significantly more aggressive performance pay structure as compared to private sector companies across most levels of management.

Here’s the data – compensation levels for a white collar executive, in the first 10 – 12 years from the time that he / she starts their career, is higher in PSUs as compared to private sector companies. The size of the gap ranges from as high as 150% in the first couple of years down to 10 – 12% in the later years. And hence the reality is that for the largest talent pool – and it is a fair assumption to make that the largest talent pool for organizations sit in junior and mid management jobs – pay is better in PSUs than in the private sector.

The data on performance orientation in pay is equally stark. Across almost all levels of management, save for the absolute top management jobs, the performance pay (PRP in government language) levels for PSUs are as high, if not higher than private sector. Here’s a comparison – the average variable pay across industries in the private sector is approximately 22% - 25% of fixed salary. The corresponding number, under the 2nd PSE compensation guidelines is 23% of fixed salary. As we argued before, even if the quantum of fixed pay in PSUs upto certain management levels then even in absolute terms, the amount of money that someone can earn through incentives in PSUs is more than in private sector.

The flaw actually lies elsewhere – two areas in my opinion that need a drastic relook when the 3rd PSE Compensation board sits down to deliberate. Firstly, the fact that PSU compensation flattens after a point creates a disincentive for good talent to join at mid management levels and aspire to grow in their organizations. On the other hand it provides an incentive for great internal talent at those levels to start looking at the private sector for better opportunities. The second flaw lies in the way the entire PRP process is run in PSUs – most PSUs (usually outside of the “Navaratnas”) do not have a structured approach towards setting annual MOUs (read annual targets) and end up setting goals that are quite unreachable for their levels of investments or the market realities – PSU chiefs I have spoken to often complain about government satraps randomly adding another 10 – 15% to their targets. With targets not getting achieved, the incentives do not get paid out and given most of these companies have seen this happen for multiple years, the belief in the PRP system itself goes away. Downstream, employees and managers don’t set individual targets and goals seriously and randomness sets in to the entire process.

PSUs have tremendous potential in India – they sit on some of the best intellectual and physical capital – and if the Make in India aspiration has to fructify, these organizations need to be given a strong boost ground up. Reforming the managerial compensation system will have a large role to play. And as we see the numbers, it’s not even that expensive or mammoth a task!

- By Anandorup Ghose, Partner – Talent & Rewards, Aon Hewitt Consulting

The thoughts and opinions shared here are of the author.