New performance related pay criteria for CPSEs: Revised pay matrix for employees seen to aid privatisation – The Financial Express

The combined salary bill of around 250 CPSEs stood at Rs 1.53 lakh crore in FY19; these firms employ over 15 lakh people.

The staff of Central Public Sector Enterprises (CPSEs) will lose on their performance related pay (PRP), if the firms fail to meet new goals of market capitalisation, return on capital, asset-turnover ratio as well as production and capex targets. These parameters will be included in the PRP criteria under the customary Memorandums of Understanding (MoUs) being signed between administrative ministries and individual CPSEs, effective 2021-22 financial year.

The move, while seeking to improve the performance of CPSEs, will also help boost investors’ interest in these firms, many of which are to be privatised over the next few years under a new policy.

Another new parameter being included is Ebitda (earnings before interest, taxes, depreciation, and amortisation) which will replace ‘operating profits’ to capture a firm’s operating profitability more accurately. While goals on market capitalisation, asset-turnover ratio and return on capital employed carry 5 marks each in a total of 100, achieving 75% of annual capex target by the third quarter will fetch 2 marks.

Marks for production/generation/transmission have also been doubled to 20 to ensure the CPSEs keep utilising their capacities.

The revised MoU guidelines are aimed at building skin in the game for the management of the CPSEs while aiding the Centre to fetch more non-debt receipts from disinvestment, a source said.

What this means is that a slippage in the performance on the parameters could result in a firm’s performance rating downgrade and consequent reduction in variable pay of its staff.

Currently, PRP can be as high as 150% of basic pay for CMDs while it is 40% for the lowest grade officers, if the rating of the PSU performance is ‘excellent’ (a score above 90%), which ensures 100% PRP eligibility. A downgrade would bring down MoU rating from ‘excellent’ to ‘very good’ and from ‘very good’ to ‘good,’ resulting in reduction from 100% eligibility of performance-linked pay for excellent rating to 80% and 60%, respectively. Less than 50% score means staff may be denied PRP.

The combined salary bill of around 250 CPSEs stood at Rs 1.53 lakh crore in FY19; these firms employ over 15 lakh people.

The CPSEs’ aggregate return on net worth (net profit as % of net worth), which was 13.87% in FY14 came down to 12.11% in FY19. Return on capital employed (operating profit as % of total capital employed) has fallen to 10.76% in FY19 from 12.93% in FY14. Similarly, the assets turnover ratio (total income to total assets) reduced from 0.76 in FY14 to 0.61 in FY19.

With listed CPSEs losing about Rs 4.9 lakh crore in market value between March 31, 2019 and September 30, 2020, the government has been working on an action plan to restore and boost the M-cap of these entities.

The market capitalisation of listed CPSEs (about 58 of them) stood at Rs 8.8 lakh crore on September 30, 2020, down 36% from Rs 13.71 lakh crore on March 31, 2019. During the same period BSE M-cap rose 1.3%. In fact, the market capitalisation of all the listed CPSEs was 42% lower than that of Reliance Industries (Rs 15.2 lakh crore) alone as on September 30, 2020.

In the last few years, CPSE capex has remained robust (about Rs 4 lakh crore from own resources in FY21BE). The Centre has been prodding these firms to achieve 75% of capex target by Q3 by front-loading capex to aid fixed capital formation in the economy, key for faster revival of the economy.