Finance Ministry gives in-principle nod to ESOPs by PSU banks

New Delhi: Finance Ministry has agreed in-principle to allow public sector banks to offer stock options to their employees from next fiscal -- a move aimed at retaining experienced hands with better incentives.

According to sources, Employee Stock Option plans (ESOPs) could be given by those banks which have not only earned substantial profit but also made remarkable improvement in managing NPAs.

It will help motivate employees to work towards strengthening the financial status of their banks so that their share value rises, sources said.

Although the Finance Ministry has given in-principle nod, the finer details are being worked out like what percentage of profit can be earmarked for ESOPs, sources said, adding, this is based on the suggestion of Banks Board Bureau (BBB).

One of the proposals is to issue shares equivalent to a certain percentage of banks' net profit to employees which is being examined.

For large banks, the ESOPs could be as much as 5 per cent of profit after tax while for the smaller ones, it could be about 3 per cent but no decision has been taken yet, sources said.

Apart from ESOPs, bonuses and other performance-linked packages are also being discussed as suggested by BBB, sources added.

ESOPs are common in the private sector, where companies offer stocks to reward and retain key and top-performing employees.

Since the employees stand to benefit from any appreciation in stock price, ESOPs also help in aligning the interests of the employees with those of shareholders.

Earlier in January, BBB chief Vinod Rai had said the compensation package across the board of public sector banks needs to be improved.

"Maybe we are not able to do much with the fixed part of compensation package but variable part we are hopeful that in the next financial year we will be able to introduce a far more attractive package which will have bonuses, ESOPs and other performance linked incentives as part of the package," he had said.

It can be monetary or non-monetary benefits to make it more attractive for professionals to enter public sector banking space, he had said.

Last year, the then RBI Governor Raghuram Rajan also made a case for offering ESOPs to bank staff.

"With public sector banks' shares trading at such low levels, a small allocation to employees today may be a strong source of motivation, and can be a large source of wealth as performance improves," Rajan had said.