Monday, January 21, 2008

Now, progress to performance pay

Commensurate with the status of the high offices that they hold, the government recently announced a doubling of the salaries of the President and vice-president, and increasing emoluments for governors. The last pay hike for dignitaries holding the highest constitutional posts was in 1996. This has triggered a debate where many feel that the exercise of power and the opportunity to shape the nation’s destiny should transcend considerations of financial reward.

Whether or not these pay hikes would serve as a benchmark for the Sixth Pay Commission is a question that has no easy answers. The stock Markets are booming, the Economy is doing well and foreign investors are eager to set up shop in India. Trade unions and government employees’ associations would be tempted ask why their own salaries should not match skyrocketing wages in the private sector.

With the Fifth Pay Commission’s call over ten years ago to downsize government by a third not taking place, the task of the current commission becomes onerous. Eminent economist and member of the last pay commission Suresh Tendulkar notes that while it is necessary to pay better salaries at higher levels, to do so, the number of posts at such levels need to be reduced. Only then could the numbers below be reduced.

One possible solution, widely used in the private sector, is to bring in performance-related pay (PRP), where a variable part of pay is awarded depending on performance. Many OECD countries have had PRP for decades. PRP can foster individual motivation at the senior level and help compete effectively with the private sector for talented employees. The government could use PRP as a way of containing the wage bill by reducing automatic progression through salary levels and refuting the common perception that civil servants are unaccountable and overpaid by demonstrating that their performance is monitored.

The one note of caution to be borne in mind is the objectivity in rating performance. Measuring performance through performance appraisals is a difficult process. The tendency is to rate the maximum number of civil servants as ‘fully satisfactory’ or better. The emerging trends are to distinguish between top and bad performers, and by using quota systems and forced ranking systems to specify the proportion of employees placed in higher categories. The Sixth Pay Commission has, therefore, assigned a study to IIM-Ahmedabad to examine the feasibility of PRP in government—a step in the right direction.