State-owned banks simply cannot match the compensation packages paid by their newer private sector counterparts.

At a recent meeting of public sector bank chiefs with the finance minister, a bank chairman was reported complaining to the finance minister if PSBs have not performed as well as private banks such as the ICICI Bank [Get Quote] and HDFC Bank [Get Quote], it is because they cannot pay enough to attract the 'right' talent.

Management graduates and other professionals typically demand a compensation package higher than the pay-scales of PSBs.

PSBs follow an industry-wide wage pact brokered by the Indian Banks'Association, with officers belonging to Scale I earning a basic pay of Rs 10,000 a month, and those in Scale VII earning a maximum of Rs 29,340.

Pay-scales are uniform across the board and performance-linked incentives and flexibility to pay extra is limited, according to a senior official of a public sector bank.

The chairman of a PSB earns about Rs 45,000 per month (Rs 540,000 per annum). An executive director's salary is about Rs 43,000 per month.

The chief of State Bank of India [Get Quote] gets a couple of thousand rupees more, as his salary is linked to the pay-scale of a secretary in the government, while other bank CEOs'packages are linked to an additional secretary's pay-scale. EDs draw the same salary as a joint secretary.

However, the annual remuneration of K V Kamath, managing director and CEO of ICICI Bank, will be over Rs 2.47 crore (Rs 24.7 million) this year and that of UTI Bank's [Get Quote] boss, PJ Nayak, will cross Rs 1 crore (Rs 10 million).

HDFC Bank Managing Director Aditya Puri's salary in 2005-06 was Rs 1.3 crore (Rs 13 million), and his basic salary will go up by 25 per cent this year -- from Rs 72 lakh (Rs 7.2 million) to Rs 90 lakh (Rs 9 million) per annum.

The constraints are visible in recruitment policies. A few years ago, large PSBs like SBI and Bank of Baroda [Get Quote] (BoB) ventured into B-school campuses, recruiting graduates from mainly Tier II B-schools, on a contractual basis at market-related salaries.

SBI, which recruits probationary officers through an all-India examination at the entry level, has also started inducting a small percentage of its officers from B-schools.

It hires, on an average, 5 to 10 students from Jamnalal Bajaj Institute of Management Studies every year, at an average salary of Rs 550,000, compared to Rs 700,000 to 1400,000 offered by private banks.

Even at a Tier I school like IIM, Kozhikode, SBI, which is a regular recruiter with an intake of five students on average, offers a package of Rs 550,000 per year, against foreign banks' Rs 800,000 to Rs 1400,000.

These graduates take care of the PSBs'requirements in specialised areas like treasury, human resources, marketing and sales, credit and international business. BoB is recruiting around 500 officers.

However, offering market-related salaries on a contractual basis to a handful of recruits does not augur well for these banks. Says a senior PSB official, "Out of 100 people, if you pay one higher, it does not lead to a very conducive work environment."

As against PSBs, private banks recruit from Tier I B-schools for specialised functions, offering hefty compensation packages ranging from Rs 10 lakh (Rs 1 million) upwards. As with PSBs, a majority of their recruitments come from Tier II and even Tier III B-schools.

Says Mandeep Maitra, Country Head, human resources, HDFC Bank, "We make 13 to 15 per cent of recruitments from Tier II and Tier III B-schools and about 5 per cent from Tier I institutes. We are present in 228 cities.

For branch banking, we look at Tier II recruits and for the interiors we look at Tier III schools, which may not even be heard of, as top school graduates do not want to go there."

This policy has suited the bank well with the salary package varying from Rs 200,000 to Rs 500,000, depending on the B-school. The bank has recruited 400 management graduates since April this year. The bank also recruits a small percentage of B.Com graduates for operations and sales at a basic salary of Rs 10,000 a month.

Some management colleges are apprehensive about inviting PSBs to their campus, due to low pay-scales and perceived bureaucratic functioning.

Some students nonetheless find offers from the bigger PSBs like SBI more attractive than private banks. They believe that these banks offer exposure in core financial streams and are a good training ground.

Not surprisingly, a large number of people switch from PSBs to private  banks within their first five years on the job. "The salary differential is as high as 200 to 400 per cent," according to a PSB official.

This does not augur well for PSBs. Says the executive director of a public sector bank: "It is not only difficult to attract fresh talent, but also to retain existing talent."

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