Under the 11th Bipartite Settlement/8th Joint Note, Productivity Linked Incentive (PLI) was introduced for PSB employees broadly from part-time employees up to Scale VII. It was essentially a bank-level incentive linked to the bank’s operating/net-profit performance. The maximum was 15 days’ Basic Pay + DA. The broad matrix was:

(*Payable only if the bank has a Net Profit)

Thus, everyone in the eligible workforce shared in the bank’s performance and were accordingly to be rewarded the incentive.

The revised PLI drafted in 2024 

The Department of Financial Services, Ministry of Finance introduced a substantially different PLI scheme effective from FY 2023–24 for Whole-Time Directors and senior executives, including Scale IV–VIII.

The revised framework evaluates four broad parameters: Efficiency, Business, Asset Quality and Financial Inclusion/ Enhanced Access and Service Excellence (EASE) reforms. Each of these four parameters carries 25% weightage and each parameter has certain sub components which in turn have weightage totalling to 25%. 

The assessment incorporates comparisons with previous-year performance, Scheduled Commercial Banks/PSBs and assigned targets. This is where the controversy really begins. There is a legitimate argument for differentiating Scale IV–VIII officers and wholetime directors from the rest of the workforce as they belong to Board of Directors/ senior management and expected to carry greater responsibility on their shoulders. The Government’s revised scheme explicitly recognises this leadership responsibility. So, some differentiation by responsibility is not inherently unreasonable. However, totally ignoring the staff below Scale IV (that includes Scale I, II and III officers, clerical and sub staff) is neither fair nor justifiable. 

The revised scheme has the following major flaws. 

Bank performance and individual performance are not the same thing

This is perhaps the most fundamental problem. Bank performance ≠ individual performance. The incentive system must distinguish between the two. Bank unions have argued that this creates a disparity between roughly 5% of the workforce at Scale IV and above and the much larger workforce below that level. In this context it may not be out of place to mention that a foreign bank operating in Bharat where the author of this article worked earlier follow the policy of paying 13th month salary to all the staff members as an additional amount annually and bonus payment to the staff members based on their performance.  

The key HR question is:

Should PLI reward hierarchy, individual performance, bank performance—or all three? Hierarchy alone should not determine PLI. Responsibility should affect the potential size of the incentive, but performance should determine whether it is actually earned. A genuinely good employee can lose incentive because of factors completely outside his/her control. That is psychologically damaging.

Risk of encouraging the wrong behaviour

This is especially important in banking. If the employees are heavily rewarded for: loan growth, deposits, profitability, recovery, then they may naturally concentrate on measurable numbers. But banking also requires: compliance, customer protection, prudent underwriting, risk management, cyber security, KYC/AML, prevention of fraud, ethical conduct.

A poorly designed PLI can therefore produce: “Target achievement” rather than “responsible banking.” This is why in addition to asset quality, compliance and governance safeguards are equally essential.

The time-horizon problem

Banking decisions frequently produce consequences years later. For example: Year 1: aggressive loan growth → Year 2: excellent profit → Year 3: stress emerges → Year 4: NPA and recovery problem. If PLI is calculated predominantly on annual performance, managers may be rewarded for decisions whose negative consequences emerge later and their successors may have to suffer. Therefore, a sophisticated banking PLI should contain deferred/malus provisions. For example: If an account generated performance benefits in Year 1 but becomes a major NPA in Years 2–3 because of identifiable managerial decisions, part of the earlier incentive could be adjusted. That would align PLI much better with responsible banking.

Measurement can become excessively complicated

A good PLI should satisfy three tests: (i) Employee should understand it. (ii) Employee should be able to influence it. (iii) Employee should be able to calculate it. If the formula requires several layers of: bank performance, peer-bank comparison, target achievement, asset-quality adjustment, efficiency adjustment, governance assessment, the employee may no longer understand the relationship between his/her work and the eventual payment. Complexity reduces motivational value.

PSB-specific difficulty: not all banks start from the same position

This is another important issue. Ler us take an example: Bank A has already achieved excellent asset quality. Bank B has poor asset quality and substantial legacy NPAs. If both are evaluated purely on improvement over the previous year, Bank B might show a larger percentage improvement even though Bank A remains substantially stronger. Conversely, if absolute performance is used, the historically stronger bank may have an advantage. Therefore, the scheme needs a combination of: absolute performance + improvement + peer comparison. 

The revised scheme’s use of different evaluation methodologies is therefore conceptually useful, but the exact weighting becomes critical. 

An important issue of fairness

There are actually three different kinds of fairness involved.

1. Internal fairness

Are employees at different levels being treated proportionately?

2. Performance fairness

Are people who perform better actually receiving more?

3. Responsibility fairness

Are people being held responsible only for things they can reasonably influence?

A good PLI must satisfy all three. A scheme can be financially generous but still be perceived as unfair if these three principles are not balanced.

Suggestions for a three-layer PLI

Layer 1 — Bank performance: 40%

Everybody should be treated as part of this since Bank performance is a collective effort. Profitability, efficiency, asset quality, capital strength, customer/service could be the indicators for bank performance. This promotes team spirit.

Layer 2 — Unit performance: 30%

Applicable to: branch, regional office, zonal office, department, specialised vertical. This creates the line of sight between the employee and the result.

Layer 3 — Individual performance: 30% Based on role-specific KPIs.

For example:

A future PSB PLI should ideally have:

① No PLI for serious misconduct/fraud/governance failure

② Malus/clawback where later evidence shows that performance was achieved through imprudent decisions.

③ Role-specific KPIs

A credit officer shouldn’t be assessed exactly like a marketing officer.

④ A substantial team component

Banking is fundamentally a team activity.

⑤ A reasonable individual component

Otherwise PLI becomes merely a bank-wide bonus.

⑥ Transparent formula

Every employee should be able to understand how the number was arrived at.

⑦ Independent validation

The appraisal should not depend solely on the immediate superior.

⑧ Ceiling on individual differentiation

Extremely large disparities in the rewards can damage teamwork.

⑨ Special treatment for control functions

Risk, audit and compliance personnel should not be rewarded simply for business growth and instead their role specific KPIs should have due weightage to reflect their true performance.

⑩ Multi-year performance adjustment

Particularly for credit and asset quality.

The fundamental idea of PLI is not the problem. The real question is how PLI is designed. The 2020 model had an important virtue: collective ownership. But it had a major weakness: it did not adequately distinguish individual contribution.

The 2024 model tries to correct that by introducing stronger performance differentiation for senior executives. But it creates another problem: the danger of excessive differentiation between cadres and insufficient connection between the individual’s actual contribution and the bank-level outcome.

The best model would therefore not be: “Everybody gets the same.” Nor: “Senior executives get dramatically more based on individual appraisal.” It would be: Bank performance + Unit performance + Individual performance + Long-term risk adjustment. That would make PLI a genuine performance-management instrument, rather than either a uniform annual bonus or a senior-management reward scheme.

Consequent to the threat of nationwide bank strike by the bank employees, on 7 September 2026 the Government announced that the 19 November 2024 PLI scheme would be kept in abeyance for FY 2025–26 and that the structure would be reconsidered through the ongoing Bipartite Settlement/Joint Note discussions. Let us hope that the suggestions mentioned in this article would be duly considered and both the PSB employees and the union government who is the major stakeholder of PSBs, will strike a deal with a consensual approach.