Monday, March 24, 2008

6th pay commission report is out

The 6th pay commission report came out today.

Decompression of wages

Broadly speaking, wages of government employees in India are too high at the junior levels and too low at the senior levels. Before the 6th pay commission, the wage ratio of the top to the bottom was 10.7. My rough thumb rule is that by comparison with the labour market at large, wages at the bottom are 2x to 3x too high, and wages at the top are 3x to 10x too low. If such adjustments are made, the top to bottom ratio would rise to something like 45.

How do I know so clearly that at junior levels, salaries in government are 2x to 3x too high? Some time after I left the Ministry of Finance, one day, I encountered a chap who had once been my driver while I was there. I asked him how he was faring and he said things were not good at all. He had been assigned to a certain JS who was not nice to him. So he outsourced his job. The government pays a driver perhaps 3x higher than the public market price of a driver. So my ex-driver recruited a driver from the public market, sent him in to work every day in his place, and pocketed a neat profit off the wage differential (even after some money was paid to people in the payroll department to keep them quiet).

The 6th pay commission has made progress on increasing inequality by getting the ratio up to 12. But this is tiny progress when compared with the scale of the problem. From 10.7 to 12 is progress, but is just not enough when compared with a normative goal like 45.

Under their proposal, the salary of a Secretary goes to Rs.80,000 a month. This is small progress. In my mind, a number like Rs.300,000 a month would have been about right.

Treatment of regulators such as SEBI

The 6th pay commission has made genuine progress on delinking wages of the chairman and members of independent regulators, such as SEBI, from government wages. Their proposals (page 632) envisage a CTC for the chairman of Rs.300,000 a month and Rs.250,000 a month for the member. I think this is about right. This could be a breakthrough for addressing the HR problems of independent regulators in India.

In 2005, I had done a presentation at Centre for Policy Research where I had said that the price at which it was not hard to recruit good quality EDs at SEBI was Rs.100,000 a month plus house plus car. With the above revision of wages for the chairman and members, we're about there in terms of getting the price of the ED right.

As far as I could see, RBI is not listed in this special treatment.

Big picture

There is a certain sense of entitlement about civil service wages having to go up through time. I think this is the wrong way to think about it.

When a government buys (say) steel, it sets an objective technical benchmark of what kind of steel is required, and then sources it at the lowest possible price from the open market. The government is willing to pay market price - and no more than market price - when buying steel of the required technical attributes.

This is exactly how the private sector labour market works. The price of a driver of acceptable quality in Delhi is probably Rs.4,000 a month, and a private employer would not pay more than Rs.4,000 a month to get a driver.

When the State is engaged in the production of public goods, there is no reason why the same style of procurement should not be applied for labour. Civil service HR policy needs to recruit the required technical capability at all levels, and pay the L1 price in order to get there. As an example, large corporations use salary surveys by HR companies in judging (say) the price of a personal assistant in Bhopal. Similar methods can be used by the State.

If this strategy is encoded into the civil service HR process, then the periodic resetting of wages by a pay commission would not be required. Instead, benchmarking to wages in the overall labour market would be an ordinary part of the year-by-year wage adjustments, as is the case with the private sector, and as is the case with steel.

Implications for NPS

The New Pension System was excluded from the terms of reference of the 6th pay commission. With a 20% contribution rate from civil servants into NPS, the flow of contributions will rise considerably owing to the wage hike.

Fiscal implications

I don't think anyone understands the impact of this on the consolidated expenditure of centre, states, local government, autonomous bodies, grant-in-aid institutions, etc.

19 comments:

  1. I think you have a mistake: "Broadly speaking, wages of government employees in India are too low at the junior levels and too high at the senior levels."
    Sandeep Parekh

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  2. On high wages at the junior levels, I remember my father's driver making about 50% more than a friend of mine who taught Mathematics at the undergraduate level. UGC scales weren't available for all posts in his college then, and starting salaries for lecturers were as low as 6k gross per month, lower than group 'D' employees in a Govt. establishment, not to mention the pension, gratuity, medical allowances, education, and sundry other benefits that are simply taken for granted in the Govt.

    At the top, PSUs like the ONGC are currently facing severe talent crunches due to their disparate pay structures that have lead to large-scale attrition of skilled professionals to better paymasters. It may not be easy to provide a figure to the 'right' compensation of top Govt. officials, but the fact remains that a ratio of 1:12 just does not help, when such ratio could easily cross 1:100 in private companies.

    The overall burden of Rs26k cr includes about Rs18k cr of arrears that the Govt. might find difficult to pay out in one go without running into a fiscal hurdle, but with an election looming on the horizon, such a step may not be unthinkable.

    Among the proposals, the rationalization of payment categories from 34 currently to about four major bands, with performance incentives, and grade pay, is a step in the right direction.

    -Tir

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  3. 36 lakh p.a. for Chairman of the regulator ?? Even Compliance Officers in private sector mutual funds with 5-7 years of workex and one of our street MBA degrees are making that much annually.

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  4. You have left the fiscal thing untouched, but I believe that is something which would interest people other than govt employees. Waiting to read something on that front from you.

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  5. There is nothing for the Scientific community in the pay commission. A top notch scientist who has put up almost 30 years of research gets about 70k per month while Techies with 8 years exp get much more than that. Definetely the attrition rate is going to increase. I am scientist in Dept of Space who has put in 10 years or exp still cannot afford even a Tata Nano car.

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  6. You are right about the ration of senior level wages to junior level wages being low. Perhaps it has to do with the socialist vision of the Indian polity. Nothing wrong with that except for somethings.

    The government is clearly failing to attract good talent. The monetary gains from a government job is poorer than from a private sector job of similar calibre. This is one of the reasons for corruption (one of the reasons not the one reason nor is it the most important one). I have felt that the US government has solved this by guaranteeing some other things like a comfortable life after retirement, benefits that cannot be dreamed of in the rest of the population, helpful connections throughout the life etc to make up for the differential. Again, the Indian structure failed to guarantee that or sustain what was there initially.

    PS: That story of "outsourcing" by that Delhi driver is alarming. Alarming is actually a mild way to put my reaction. Isn't the JS aware of it? Is he not taking any action? It's unbelievable that this is happening in Delhi and in a central ministry. Consider the security implications....

    PPS: How did you arrive at the 300,000 figure for a Secretary? How do you value job security?

    PPPS: Isn't the salary for scientists decided separate from this? Department of space jobs used to be sought after and I am sure still considered prestigious. No more post scripts.

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  7. Sir,

    While it is true that government employees in the bureaucracy and administrative and other such ancillary services are paid significantly higher that the going market rates, what about those in the critical areas - police, military, science & education, judiciary? Don't you think the real and glaring wage differential resides there? And, that, it is far more important to plug the gaps in these areas so as to attract good talent.

    - Ravi

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  8. jayachandran:
    you will do ok in future.. techies are in bubble just like some 5-10% of indian economy is in serious bubble..
    expect serious turmoil for tech coolies and mumbadevi-gurgao junta...

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  9. These fellows are upto systematic sabotage of the system,so you buy ordinary for dear and expect special for a paultry sum (you want the special to leave creating a ordinary / poor state service provider).

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  10. How would one define junior levels and senior levels? The Pay Commission has converted all Group D staff to Group C. In fact that makes it more bottom heavier. If by junior level you mean the induction level..then its entry level talent which is most enticed by the salary...at top level there are multiple factors like...free car...house...driver not to say the least and top of all job satisfaction. Looking forward to some clarification on these counts.

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  11. Discrimination against employees joining Central Government service after January 2004, and not eligible for old pension scheme

    The 6th pay commission has totally ignored the interests of employees who have joined Central Government service after 01-01-2004, and hence are not covered by the attractive old pension scheme. The interests of employees of autonomous societies under central government, who are not offered the attractive old pension scheme are also ignored.

    The value of pension granted by the Government to employees who joined before 01-01-2004, is much higher than the 10% contribution being made by the Government for CPF for the new employees. The pay commission should have proposed additional compensation for the central government employees, who are not eligible for the old pension scheme, so that both get the same total benefits for the same work being performed.

    The employees in private companies get 12% monthly contribution from employer for EPF, which is higher than what the new central Government employees get. But the pay commission report states “mere comparison of the pay or pay scale without taking cognizance of the total package of allowances and benefits available within the Government may not be appropriate especially as the value of pension granted by the Government and the value of job security provided cannotbe undermined since they form major components of the total package.”

    It may be noted that the new central Government employees are getting very much less pension benefits compared to both old central government employees as well as the private sector employees. But the pay commission has totally and conveniently forgotten this point, maybe because the the IAS officers in powerful positions are interested only in making their existing pension schemes more attractive.

    Hence, it is requested that the Government should initiate an actuarial study on the old pension scheme, and provide additional compensation to the new employees so that the pension savings of the new employees after 20 years, should be equal to the value of life long full pension with benefits of commutation, DA increases, and pay revisions. If the Government feels that the benefits under the old defined benefits pension scheme is not having much higher value compared to that offered by the new contributory scheme, then the Governemnt may offer option to the new employees to opt for the old pension scheme.

    If that is not possible, the Government should atleast not give any more pension related benefits to employees covered by old pension scheme, without giving equal benefits to the new employees not covered by the old pension scheme.

    Does the pay commission want the new employees, not covered by the attractive old pension scheme, to go to court and fight for natural justice? Natural justice demands that persons doing the same job under the same employer should get the same total salary and benefits.

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  12. Hello Ajay,

    I have two questions. I want to know who fixes the salary structure of SEBI.

    Secondly, who will implement the Sixth pay commission's recommendations in revising SEBI's pay scale? Does SEBI have the authority to do the same on its own?

    Thanks in advance.

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  13. ONLY A MILITARY COUP CAN SORT OUT THESE POLITICIANS AND BABUS WHO HAVE EATEN THROUGH THE FIBRE OF OUR DEMOCRACY

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  14. I just want to know what does a secratery ronk IAS who wants or whos pay is fixed at 90,000/- PM do with that money where is the justification and what does he do with that money

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  15. guys, am doing my engg even my brother ..tooo .my mother is a govt employee..and we are desperately waiting for 6th pay commision to b implemented...so that we can have better education .
    can any1 tell me by wwhat time it will b implemented..! coz...its just been delaying dnt u think so?

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  16. I think driver example taken by you is not appropriate. take example a clerk. With 5 years experience, his salary may be Rs 9 to 10 K per month. This is too low as compare to open market. In my opinion, in Government sector, salaries are low for Junior as well as for senior staff. These should be hiked many fold and productivity and accountability should be increased immensely.

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  17. I retired from the Indian Air force after 15 years of service in the rank of Aircraftsman in Group X ( Radio Fitter ). Can you please let me know the details about my pension after the sixth pay commission ? My mail id is srinivasasubramanian@gmail.com

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  18. Sir,

    My Basic was 13500 in the Pay Scale on 01.01.2006 in the Pay Scale 12000-375-16400. I got promoted to 14300 on 29.06.2007 in the Pay Scale 14300-18300 and my Basic was fixed at 14700 on Oct'2007 which was my increament month. Please tell me what will be my present basic with detail calculation.

    P.K.Sahoo
    pksahoo67@gmail.com

    ReplyDelete

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