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Pay Commission: Missing the Wood, Missing the Trees

Pay Commission: Missing the Wood, Missing the Trees

The Sixth Central Pay Commission's recommendations have pleased none and displeased many. A critical examination of some of the main recommendations, which have largely been accepted by the central government, is offered here.

COMMENTARY

Pay Commission: Missing the emoluments and, prospective implementation of recommendations relating to
Wood, Missing the Trees allowances. This commentary highlights certain aspects of the report that largely
revolve around the notion of “fairness”.4
A subgroup of issues are discussed
Mukesh Anand under “work environment” while issues

The Sixth Central Pay Commission’s recommendations have pleased none and displeased many. A critical examination of some of the main recommendations, which have largely been accepted by the central government, is offered here.

I thankfully acknowledge the discussion with Prof Bansal, National Council of Educational Research and Training.

Mukesh Anand (manand@nipfp.org.in) is at the National Institute of Public Finance and Policy, New Delhi.

Economic & Political Weekly

EPW
august 30, 2008

O
n the eve of Independence Day, the central government gave its final approval to the report of the Sixth Central Pay Commission (SCPC). The revised pay structure for central government employees is likely to be implemented (by the end of September 2008) before the onset of the festive season.

The SCPC had recommended adoption of a system of four running pay-bands,1 one each for groups B, and C,2 and, two for group A. In combination with a scheme of grade pay that accounts for promotion and seniority in hierarchy, the running pay-band system is expected to eliminate stagnation. Further, the disparity ratio between the minimum and maximum s alary has been revised upwards and pegged at 1:12,3 and employees are to be awarded an annual increase of 2.5 per cent of total pay (pay in the pay-band + grade pay). As a special dispensation, not more than 20 per cent deemed as high performers in the group-A pay-band PB3, may be eligible for a higher annual increment of

3.5 per cent of total pay.

This special dispensation has been termed as the performance related incentive scheme (PRIS). Implementation of the PRIS, however, entails a performance measurement system that has little chance of success if administered centrally. Thus, the commission is of the view that “…the form of performance related incentive should, accordingly, be organisation and design specific...” (SCPC report, 2008, para 2.5.13). It has therefore suggested a flexible approach whereby “performance has to go hand-in-hand with delegation of powers” and “[a]ccountability should be seen as the ability of the system to deliver results and services effectively and in a responsive manner…..” (para 2.5.15). It appears unlikely though that PRIS maybe evolved any time soon.

The commission has proposed retrospective implementation (from January 1, 2006) of its recommendations relating to of fairness in compensation across generations have been subgrouped under “retirement benefits”.

Fairness in Pay

In the questionnaire posted by SCPC on its web site, inviting response from public and interest groups, the first group of questions related to comparison between compensation (for labour) in the public and private sectors. In response, the commission received several suggestions for parity between public and private sector compensation (especially by, and for employees in group A). The SCPC, however, noted that, “…the main consideration in the private sector being ‘profit’, an equal comparison with the government is not going to be ever possible” (para 2.1.15). Contrast this with recent appeal by senior ministers of union cabinet for restraint on magnitude of executive compensation (in the private sector) and a clarion call for improved corporate social responsibility.5

There are several reasons to avoid such a comparison. First, there is no hard evidence to assume that remuneration in private sector is efficiently determined and, return to labour, fair. Second, left to itself, the private sector may not ensure even adequate remuneration for minimum (decent) standards of living. Third, government’s effort to circumscribe inequality could be severely compromised if it fails to address this sufficiently in its own compensation structure.

Government service is adequately geared for opportunities to add value through service contribution. It also fosters parity in education and learning, without undue discrimination or predisposition in favour or against particular faculties. The SCPC has strengthened this feature by arguing that “…grant of s pecial allowance for performing the assigned duties in respect of any organisation is not justified because the same is taken care of by salary attached to the posts.” Over time, special allowances tend

COMMENTARY

to grow and perpetuate with their special characteristics dissolving into normal expectation. The report argues for elimination of some such allowances and recommends that “[P]erformance of duties beyond the normal call should, in the revised scheme of things, result in higher performance related incentive”.

The commission avers that risk associated with a service should be effectively addressed by insurance, with the cost of premium borne by government. It further argues that “pecuniary allowance cannot suitably compensate the element of risk” (para 4.2.67). The commission has thus recommended an increase in the monthly subscription rate and insurance cover, by six times for all groups. It is not clear, if any actuarial exercise was conducted to arrive at these numbers, as the scheme is supposed to be run on a self-financing basis.6

The non-practising allowance for medical practitioners has been retained. While, it is perhaps fair to admit such an allowance to compensate for initial disadvantage (and even to motivate curricular pursuits), there is a weaker rationale to continue with this throughout the service life. Further, there is little evidence to suggest if this has effectively dissuaded people from engaging in private practice. Several prospective groups have often requested a similar dispensation, in the garb of loss of benefit. The moot question is to delineate the conditions under which a government may be justified in introducing such differences between faculties of learning and functions in service. Though it may not be intended, it perhaps offers others a rationale for indulging in rampant practices. This is most evident among teachers who constitute one of the largest sets of employees at the state g overnment level.7

In the extant regime, irrespective of scale within a group, emoluments of an individual are determined by basic pay. Revision of pay-scales, often lead to some bearable readjustment (or compromise). But, as an example, note the wide gap in total pay in the revised scheme summarised in the table (p 13) (compare columns 3 and 7).

Thus, SCPC recommendations would nearly double the gross salary8 of an individual with current basic-pay of Rs 14,300 in S-28 scale. However, the gross salary of an individual with the same basic-pay in S-24 would rise by about only 35 per cent. Put differently, an individual with extant basic pay of Rs 14,300 in S-28 stands to gain at least 45 per cent more than an individual with the same basicpay in S-24. This quantum of readjustment is unlikely to command passive acceptance by those, relatively speaking, adversely affected.

Work Environment

Several features of government service contribute to the overall quality of life for its employees. The SCPC’s suggestions on flexi-time and flexi-space for women

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Selection will be on the basis of CV and a half page note on your motivation (why you wish to participate). These should be sent by email to: ysp4@igidr.ac.in no later than 15 September 2008.

august 30, 2008

COMMENTARY

employees may facilitate some reduction in the gender biases in employment.9 As per the FCPC report there were 2.83 lakh central government women workers, constituting 7.51 per cent of the workforce. The 2001 Census of central government employees shows only a marginal increase in these numbers, with women workers constituting 7.53 per cent (2.92 lakhs)10 of the workforce (para 4.7.1). Introduction of such practices though entail significant changes in work assignment, workplace monitoring and organisational design. Success in this area would depend critically on the quality of mechanism design inputs for its implementation.

Table: Gaps in Total Pay (Rs)

their familial, social and occupational obligations. However, some recommendations pertaining to pensions and retirement benefits are a red-herring, susceptible to misuse, and likely to have serious financial repercussions.

Retirement Benefits

The commission’s recommendations are to raise retirement benefits, as also to relax the criteria for claiming benefits. Gratuity payment limit is proposed to be raised to Rs 10 lakh (from Rs 3.5 lakh). It has also proposed earned leave encashment of up to a maximum of 60 days d uring the career, and further that this

FCPC SCPC

opportunity for misuse (through patronage or disgruntlement), lower is the burden on the exchequer, the fairer it is between (labouring) generations.

The SCPC has recommended a graded increase in the quantum of pensions, based on attainment of a certain age. The additional quantum reaches 100 per cent of basic pension at the age of 100. The ostensible reason offered is “…that older people require a better deal because their needs, especially those relating to health, increase with age” (para 5.1.32). However, the rationale for an increase is neither in keeping with the spirit of the Supreme Court’s verdict, nor justifiable especially when health or medical expenditures are covered under the central government

Pre-revised Scale Pay-scale (minimum-annual Basic Pay Revised Pay Band Revised Running Grade Pay Total Payhealth scheme (CGHS) and medical facili increment-maximum) Pay Band 2 3 4 5 6 7 ties for central government workers and

S - 24 14,300-400-18,300 14,300 PB-3 15,600-39,100 7,600 32,490
S - 28 14,300-450-22,400 14,300 PB-4 39,200-67,000 9,000 48,200
S – 27 16,400-450-20,900 20,900 PB-3 15,600-39,100 7,600 44,770
S – 29 18,400-500-22,400 20,900 PB-4 39,200-67,000 9,000 55,620

FCPC: Fifth Central Pay Commission (SCPC report, 2008, pp 67-69).

Another welcome suggestion relates to the system of advances and loans for government staff. The commission is in favour of operationalising this through banks to foster transparency. However, the commission’s suggestion, on a 2 (four in the case of disabled) per cent interest rate subsidy from the normal bank lending rate is debatable. Should this differential be applicable under all interest-rate regimes? Moreover, like several other subsidy schemes, this would yield more benefits to those in the upper echelons. It may therefore be desirable to adopt some such design that facilitates budgeting and circumscribes any perverse outcome.

Employment with the public sector has continued to be coveted by large sections of Indian society, across all income and education strata.11 One of the reasons could be the perceived lower level of commitment liability of private sector employers towards their employees. Commitment liability is manifest along several dimensions, for example, work environment, work timings, etc, but more importantly in the social security provisions. The SCPC report has several commendable suggestions that reduce the conflict often faced by individuals in their effort to strike a balance among

Economic & Political Weekly

EPW
august 30, 2008

may not be deductible from the maximum permissible leave encashment possible at the time of retirement.

Citing the Supreme Court judgment12 that suggested pensions to be a right, commensurate with service rendered, the SCPC appears to have misjudged the historic verdict in doing away with the requirement of full service condition (of 33 years of qualifying service) for full pension. It is perhaps inappropriate to adjudge service rendered to be completely subsumed in the current emolument level,13 and ignore the duration of service.

While raising the quantum of retirement benefits (through full wage and inflation indexation), the SCPC has also relaxed the basis (of emoluments) to the last drawn pay or the average of the last 10 months, whichever is higher. Given that in government service, emoluments are gradually ratcheted upwards, the latter provision is rendered redundant. In combination with repeal of the provision of full service for full pension, this is likely to be misused or provide ample opportunity for misuse by creating pressures for seeking or offering patronage.14 The longer the duration over which the a verage emoluments form the basis for pension entitlements, the lesser is the pensioners. While there is little doubt that expenditure related to health and medical needs tend to rise with age (and shoot up sharply over a brief period preceding death [Nyce and Schieber 2005], these must be balanced against reduction in other expenses. A longer post-retirement life does precious little in enhancing service contribution or service rendered to rationalise scaling up of benefits.

Despite documented increases in expectation of life and some evidence suggesting no-loss in work-efficiency at least until the age of 62, the SCPC has not raised the normal age of superannuation. The basic premise encouraging early retirement is incoherent, as it ignores contribution and perhaps even belittles talent and capacity. It is naïve to think of retirement policy as either a substitute or a complement to employment policy. Job replacement is not synonymous with job creation that is the need of an expanding labour force. Neither should perpetual and relative downsizing of the central government establishment be adjudged as rightsizing for all times, nor can a continual decline in the average age of workforce offer continual improvement in efficiency.

The largest adverse fall-out of such proposals would be to lubricate an increasingly unsustainable pay-as-you-go (PAYG) system.15 Liberalisation of benefits is likely to pre-empt a larger share of national financial resources for a relative minority in the population, leaving very little scope

COMMENTARY

to expand coverage of the currently underdeveloped social security system.16

Complete wage and inflation indexation of pensionary benefits is likely to raise support ratio (or replacement ratio estimated as the ratio of total pension expenditure to total wage expenditure) transferring a higher proportion to the elderly [Anand and Chaudhury 2007]. No change in normal age of superannuation is likely to raise passivity ratio (estimated as a ratio of duration out of service to duration in service) due to improvements in expectation of life and improved longevity. The system dependency ratio (estimated as a ratio of number of pensioners to number of workers) of the central government establishment may rise sharply, if the number of new recruits continues to trail the number of new retirees. None of these can be virtuous for economic development.

Concluding Remarks

The commission observes that “[N]on performance of the administrative structures, poor service quality and lack of responsiveness, and the subjective and negative abuse of authority have eroded trust in governance systems which needs to be restored urgently” (para 6.3.2). This, however, is just one example of the several such observations dispersed throughout the report, lamenting the sloth and decay of governance. These appear ironic in a report perceived to raise compensation and reward government employees (across the board), without any provision for penalty.

Another frequent rhetoric in the report castigates, “…a structure in which form is more important than substance and procedures are valued over end results and outcomes.” One is left wondering whether the commission wishes to suggest supremacy of outcomes over procedures. The report, however, offers no justification to substantiate if at all there is likelihood of conflict between the two. But, documentation and procedures in government are also important, if not as important as end results, in order to maintain continuity.

On the one hand, the commission has liberalised the retirement benefits to incentivise early dissociation, while on the other it has used the alibi of stagnation inherent in the extant scale structure to suggest running pay bands. In the new proposals, there is no clear signal that would indicate relative underperformance, while the stagnation point in the earlier schema could be so interpreted.17 In practice again, a transparent promotion policy conferring greater authority and responsibility, may serve to be motivational rather than a 1 per cent additional annual increment. Further, as argued earlier, the proposed structure of retirement benefits would most likely have (serious) adverse implications for three key parameters of a sustainable social security system, namely, replacement, passivity and dependency ratio [Anand and Chaudhury 2008].18

It would have been desirable if the SCPC report expressed greater appreciation for the fact that there are real costs of searching, hiring and retiring. Unfortunately, there is little discussion on the desirable size and skill structure for a future form of government. The report of the SCPC was submitted on March 24, 2008, 11 days before its scheduled 18-month term was to end. Further, the SCPC wrapped up its business with almost 40 per cent of allocated budget to spare. In these attributes, the commission bucked the trend over last four commissions. The SCPC thus did not hesitate in commending that, “…a similar policy needs to be adopted in all government offices, which would increase e fficiency and improve end user satisfaction” (para 1.1.11). This, perhaps is in keeping with the current trend towards serving focused and decidedly unitary (or at most two) objectives.19

The reaction of certain employee groups and even that of the government appears to provide less reason to cheer. There have already been representations to the government from several affected (or disgruntled) groups that are unhappy with SCPCs apathy in inadequately appreciating the “risk” and “hardship” that their jobs entail or of the relatively superior faculties associated with certain others. The former include, but are not limited to those in defence services. The staff appear to be ill at ease with adequacy of recommendations that, on an average, raise extant gross compensation by about one-third or so. The commission estimated a net additional expenditure of Rs 7,975 crore for 2008-09. Financial implications of various proposals, however, grow along varying trajectories. The net impact over time may differ significantly from one derived using simple (average) inflation indexation. Some recommendations in the report risk becoming the minimum acceptable level with other ad hoc modifications in the finally approved pay structure. These may lead to haphazard calibration of public finances that sets the agenda for future research.

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    august 30, 2008

    COMMENTARY

    Notes

    1 In practice, a running pay band has a significantly wider range than that of a pay scale. Often it subsumes more than one (or a set of) pay-scale(s) with the ostensible objective of overcoming the problem of stagnation. A similar system was earlier adopted for defence personnel based on recommendations of the Fourth CPC. The Fifth CPC reverted to a system of pay scales for both civilian and defence personnel. See also table in the text for an example.

    2 The extant group D, after appropriate retraining are to be absorbed in revised group C. 3 It was 1:10.7 since the Fourth CPC.

    4 Fairness issues arise in several contexts, across cohorts within a generation, across generations, across functions, across genders, etc.

    5 Prime minister Manmohan Singh’s address, at the National Conference and Annual Session, 2007, of the Confederation of Indian Industry (CII), May 24, 2007 where he exhorted that, “…profit maximisation should be within the bounds of decency and greed” and appealed to “…resist excessive remuneration to promoters and senior executives and discourage conspicuous consumption.”

    6 All allowances are inflation indexed. City compensation allowance (CCA) is subsumed in travel allowance that is quadrupled.

    7 Incidentally, the commission appears to be confident “……that most of the states would be in a position to meet the additional expenditure” in case they adopt the recommendations put forth in their report, for their own employees (SCPC report, 2008, para 1.3.32).

    8 Gross salary includes total pay, dearness allowance, house rent allowance and travelling allowance.

    9 If extended to male employees, they may also be encouraged to contribute to their respective family and household chores.

    10 A majority of the women staff are engaged with communication and IT ministries.

    11 Though desirable, systematic comparison of the complete package of benefits, over time, between the private and public sector has several limitations.

    12 “…pension is a payment for past services rendered” in D S Nakara versus Union of India (AIR 193, SC 130).

    13 Subject to rendering only some minimum qualifying duration of service.

    14 This contemplates a situation whereby one expects the number of promotions to temporarily shoot up a month or so prior to retirement.

    15 Though there are serious issues even in sustainability of the New Pension Scheme. The SCPC appears to have ignored concern for parity in net current compensation of recruits joining before January 1, 2004, with those joining after that date. Coupled with further liberalisation of retirement benefits for the former group, it is quite likely that the government, sooner or later, may be forced to retrace the steps to introduce pension reforms for the new civilian recruits in CG services (joining service after January 1, 2004).

    16 Social security for employees in the organised private sector and quasi-public sector, is largely governed by Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF& MP, 1952), but it covers only a minority (less than 10 per cent) of nearly 450 million workers. Provisions relating to pensions and retirement benefits continue to be grossly inadequate in the unorganised sector that provides for the bulk of employment. Working of these provisions have often been

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    criticised for its failure to ensure adequate old age financial security.

    17 With running pay bands the only hope for voluntary retirement would be if people could be shamed to seek voluntary retirement. It is perhaps socially undesirable to roll out such a mechanism and simultaneously reward gratuitous payments.

    18 Growth in income or output and size of labour force are necessary pre-conditions for sustaining a pay as you go (PAYG) system. These are indeed favourable for India as a whole, but may not be so for the CG establishment on a stand-alone basis. Further a PAYG system may run into serious trouble if the proportion of deferred compensation is not carefully capped.

    19 A throwback to supremacy of “ends”, and in the commissions own words “…because the work processes in the commission were reoriented to have a result-oriented approach with emphasis on output rather than processes”.

    References

    Anand, Mukesh and Saswata Chaudhury (2007): ‘Government Employment and Employees’ Compensation: Some Contours for the Sixth Central Pay Commission’, Economic & Political Weekly, Vol 42, No 31, pp 3225-32, August 4-10.

    – (2008): ‘Demographic and Social Changes: Some Issues for the Sixth Central Pay Commission’, Economic & Political Weekly, Vol 43, No 7, pp 54-58, February 16-22.

    Nyce, Steven A and Sylvester J Schieber (2005): The Economic Implications of Aging Societies: The Costs of Living Happily Ever After, Cambridge University Press.

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    Economic & Political Weekly

    EPW
    august 30, 2008

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