Public sector bank employees may see the introduction of a variable pay component in their salary structure.

Bankers said preliminary talks on performance-linked pay, part of overall wage negotiations, have begun with the unions.

The move is aimed at offering better compensation to mid-level employees in government-owned banks to not just retain talent but also attract specialists from outside. "We can hire specialists on contract, but there are a lot of issues with the compensation structure," said a bank chief.

There are seven pay scales in public sector banks, but the difference between private and public sector compensation structure widens as employees move up the hierarchy. An assessment by some of the banks shows that the pay differential on a cost-to-company basis is not significant in the first two grades.

"There are many perks that are available to our employees such as free housing, often in prime locations. But all this is not factored in as there is no concept of cost-to-company. At the senior level, in certain cases, the difference is as much as over 20 times, which makes it attractive for public sector executives to move out," said a banker.

In recent years, the chairmen and executive directors of state-owned banks, who are not part of the industry scales, have been paid incentives for achieving the targets set at the start of the year. Other employees are not eligible for any such scheme. If banks are able to convince the unions, the performance-linked incentives will be available to a majority of the employees.

Public sector banks had 714,793 employees at the end of March 2008, of which State Bank of India [Get Quote] and its associates had around 250,000 employees.