Figuring out freedom

The ministry of finance has made important progress with the recent decision to give greater autonomy to public sector banks. What is the correct wage of a driver, a clerk, an electrician or a managing director? The simple answer is that the employer should pay market prices to the extent that he/she gets a professional of quality at each level. This guiding principle — of paying enough to attract candidates of adequate quality and no more — is absent in government. The public sector pays too much at junior levels and too little at senior levels. This creates an army of unskilled people who would love to get government jobs and a shortage of skilled candidates to guide the institution.

There is a lot of talk about the knowledge economy. Knowledge is embodied in people. A knowledge-rich organisation is one that is able to deploy top quality skills and incentives in decision-making functions. There was a time when banking was a mechanical activity and the Reserve Bank of India would tell banks in great detail what they could do. Today, the mechanical part of banking has shifted to machines (like ATMs), and highly skilled and motivated people are required to deal with risk. Public sector banks have made progress in shedding unskilled labour through arrangements like the VRS, but have not yet been able to recruit adequately at senior levels since the salaries offered are removed from market prices by a factor of 20 times to 50 times. It is critical to blend market wages that are comparable with the private sector, with accountability that is comparable to the private sector. Otherwise, high wage jobs in public sector banks will become a safe sinecure. It is critical to have complete competition among those contending for the senior posts. Beyond the age of 25, a person should not be entitled to any promotion by virtue of being an insider. Every post should face competition from the open market.

Finally, the ministry of finance has left unpleasant strictures in the recent reforms, where it will meddle in top level appointments. Well governed companies appoint a sub-committee of the board, consisting of independent directors, who recruit the managing director and establish wage policies. There is no reason for the ministry of finance or the Indian Banks Association to meddle in appointments or wages. The ministry should set an example about sound corporate governance, both for the private sector, and for other PSUs which are being misused by their administrative ministries.