Heads of 29 public sector banks are set to get a performance-linked annual incentive package. Besides, all of them will get a lumpsum ex-gratia payment on retirement, depending on the number of years they put in as directors on bank boards.

Down the line, close to 800,000 employees in the public sector banking industry, too, will get incentives, based on their performance in five key areas.

The finance ministry is expected to announce the package before the Budget.

Once in place for the state-run banks, performance-linked packages were likely to be used as a benchmark for other PSUs, sources familiar with the development said.

According to sources, the five parameters based on which the performance incentive for employees will be worked out include credit growth, deposit mobilisation, quality of assets and recovery of non-performing assets.

The maximum amount a bank can pay to employees through this route will be capped at 1 per cent of a bank's profit after tax. Based on last year's performance, State Bank of India [Get Quote] will be able to spend around Rs 43 crore (Rs 430 million) on this package. For Punjab National Bank [Get Quote], it will be around Rs 14 crore (Rs 140 million).

"This is the beginning and the quantum can be increased next year," said the source.

Employees of all departments will be considered for the package, which will be independent of a bank's performance on the bourses. Employees of three unlisted public sector banks will be covered by this package along with the employees of the listed entities.

The introduction of the incentive package will make the industry-wide wage pact brokered by the Indian Banks' Association irrelevant to some extent.

The chairmen and executive directors of PSU banks will be entitled to two separate packages.

Depending on their tenure as directors, they will get ex-gratia payment on retirement.

Besides, they will also get performance-linked annual bonus, which can run into over Rs 500,000, depending on a CEO's performance.

Their performance will be judged against achievement of targets set in the statements of intent given to the finance ministry in the beginning of the year. Financial incentives given to chairmen and executive directors will be outside the cap (1 per cent of PAT) applicable to bank employees.

After allowing individual banks to chalk out performance-linked pay packets, the finance ministry did a volte face in December and directed the banks to shelve the proposal.