- The Economic Survey released today suggests providing ESOPs to public sector bank employees to enable them to become owners in the banks. Employee stock ownership plans (ESOPs) will incentivise the bank employees to embrace risk-taking and innovation continually, says the Survey.
- The survey suggests that a portion of the government stakes can be transferred to employees exhibiting good performance across all levels of the organisation through ESOPs. Part-ownership of PSBs by employees will reduce agency problems. This is because employees who own shares are incentivized to increase market value of equity, since their direct compensation depends on share values, says the Survey.
- The Survey states: “Employees paid largely in salaries-as PSBs employees currently are-have claims that resemble debt contracts in the sense that they are fixed pay-outs made by banks. Employees paid through such fixed compensation contracts rely on implicit promise by the state to make good on their salaries (and post-retirement pensions) in the event of bank distress. Given the current flat compensation contracts of employees and the pressures from ex-post monitoring by the vigilance agencies it is hardly surprising that bank employees of state-owned banks prefer safety and conservatism over risk-taking and innovation.”
- The Survey explains that there are several benefits of giving out ESOPs to the PSB employees. These benefits include the possible change of the mind-set that of an employee to that of an owner. Employees can constitute one of the blocks of new owners of PSBs through an ESOP that is conditioned on employee performance.
- Ownership by motivated, capable employees across all levels in the organisation could give such employees tangible financial rewards for value enhancement, align their incentives with what is beneficial to the PSB, and create a mind-set of enterprise ownership for employees a long-term solution to case for employee stakes in PSBs, says the Survey.
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