The 7th Central Pay Commission Report

The Seventh Pay Commission, headed by Justice A K Mathur, submitted its report to the Centre in November, recommending 23.55% overall hike in pay, allowances and pensions of government employees from January 1, 2016. This means the Centre’s salary bill will go up by Rs 1,02,100 crore in 2016-17.

The terms of reference of 7th CPC

1. To review the principles that should govern the emoluments structure including pay, allowances and other benefits, in respect of the following categories of employees:-
   • Central Govt employees (industrial and non-industrial)
   • Personnel of the All India Services
   • Personnel of the UTs
   • Officers and employees of the Indian Audit and Accounts Dept
   • Members of regulatory bodies (excluding the RBI) set up under Acts of Parliament
   • Officers and employees of the Supreme Court
2. To review the principles that should govern emoluments, concessions and benefits, as well as retirement benefits of Defence Forces
3. To work out a framework for an emoluments structure to attract the most suitable talent to Govt service, promote efficiency, accountability and responsibility in the work culture
4. To examine the existing schemes of payment of bonus and recommend general principles for an appropriate incentive scheme to reward excellence in productivity, performance and integrity
5. To review the existing allowances available to employees and suggest their rationalization and simplification
6. To examine the principles that govern the structure of pension and other retirement benefits
7. To recommend the date of effect of its recommendations on all the above

The recommendations should consider the following criteria:

• Economic conditions in India and the need for fiscal prudence
• Need to ensure that adequate resources are available for developmental expenditures and welfare measures
• Likely impact of the recommendations on the finances of the States, which usually adopt the recommendations with modifications
• Prevailing emolument structure and retirement benefits available to employees of Central PSUs
• Best global practices and their adaptability and relevance in Indian conditions

The above information may be helpful during prelims, though it has little relevance for mains

Now, let’s take a look at the key recommendations

It has recommended overall hike of 23.55% in pay, allowances and pensions of central govt. employees with effect from January 1, 2016

• The minimum pay in govt to be set at ₹18,000 per month
• The  system of pay bands and grade pay has been dispensed with and a new pay matrix has been designed
• The Military Service Pay will be admissible only to the Defence forces personnel. <It is a compensation for the various aspects of military service>
• Introduce a health insurance scheme for central govt employees and pensioners
• The force personnel of CAPFs should be accorded martyr status in case of death in the line of duty. <Currently, it is accorded only to defence forces personnel>
• Fair and equitable treatment must be given to all services; or it will widen the gap between the IAS and other services
• A screening committee should be set up to decide on the allocation of officers on deputation to the centre on the basis of domain knowledge
• Introduce Performance Related Pay for all categories of central govt employees
• Take steps to improve the functioning of NPS and establishment of a strong grievance redressal mechanism

Now, let’s analyse various issues pertaining to personnel in govt. sector.

It is a long-pending debate that there are huge disparities between private sector and govt. employees in terms of salaries.

Let’s analyse the difference in salaries of private and govt. employees

• Compensation to Group C and D employees in govt. is greater than the private sector.< More than 90% of the workforce employed by govt. lies here>
• For Group B employees, it is similar to private sector <Govt. workforce includes approx 5% group B employees>
• However, for Group A employees, it is lower than private sector <Govt. workforce includes less than 5% group B employees>

Govt. job offers added benefits, which are not available in private sector

Pay Commission on Performance Related pay (PRP)

What is it : Paying salaries or wages based on performance

Rationale: Human beings respond to incentives. Recognition for good effort and achievement through an incentive is expected to energize and motivate officers to perform even better

What’s the problem in implementing such a scheme?

1. How to measure performance of an organization when targets are more in the nature of social and public goods which may not even be tangible?
2. How to distribute credit among various departments for such larger public good?
3. How to separate individuals from collective?
4. How to prevent PRP degenerating into routine entitlements?

The Commission notes it may be easier to implement such schemes in profit-driven private organizations where targets based on quantitative criteria make performance appraisal easier.

Pay flexibility reforms are not a silver bullet, and involve trade-offs and risks. A study of the literature on the subject reveals that employee motivation and performance are not exclusively linked to Performance Related Pay (PRP) which may only enforce temporary compliance.

Yet evidence from many countries indicates that pay flexibility contributes to management improvements, promotes an atmosphere of dialogue, rewards teamwork and is helpful in efficient task allocation.

Two important aspects to be kept in mind before evolving such a scheme:

1. Evolve proper criteria to measure performance along with setting a context where individual and organizational goals are clearly aligned
2. Devise a performance appraisal system in which the objectives of the appraisal system match with that of the reward system

Recommendation

1. Results Framework Document (RFD) can be used as the primary assessment tool for linking the targets of the organization with that of the individuals
2. Suitable changes in the Annual Performance Appraisal Report (APAR) can provide the necessary link between targets of the appraisal system with those of the RFD document

Let’s see some of the critical observations of 7th CPC

• The core of govt. employees (excluding security and commercial department) is very small
• Pay, allowances and pension as a proportion of govt. expenditure has been declining sharply. <In 1998-99, it was 38% of revenue expenditure, which has reduced to 18% in 2015-16>
• Pay and allowances in the central govt. have remained stable since 2010-11 at around 1.8%-2% of GDP
• Impact of the pay hike will be .65% of the GDP. However, some increase in the salary comes back to govt. as taxes, reducing the net impact

Often, it is argued that Indian govt. employs less people in proportion to its population. Let’s take a look at it.

Why govt. should hire more?

• Indian govt. employs less than 1.5% of its population with respect to China which employs 3% of its population
• The number of personnel per lakh population is 139 for India, against  668 for the US
• 7th CPC notes there is overall vacancy of around 18% of sanctioned strength
• It has also observed that sanctioned strength is not adequate to deliver adequate governance

Recent Developments

• The Union finance ministry has set up an implementation cell for processing and implementing accepted recommendations of the 7th Pay Commission
• Recently, several States have approached the Union govt. seeking more time in implementation of the Commission’s report.

India should implement the recommendations of 7th CPC and II ARC together, reflecting the new mindset. Govt. should be ready to pay its public officials well, increase their strength and invest in building competence.

It’s time for some questions:

1. Pay commissions are relics of an age when India was a closed economy and govt. was the major employer. This archaic model has no role in today’s economy and it’s high time India scrapped the system of setting up pay commissions. Comment.
2. Private organizations are generally thought to be more efficient than government organizations. What could be the possible reasons for this? How can we make our government system more efficient?
3. Salary hikes are generally linked to performance. This truism of management is totally lost in the public sector, where duration of employment is linked to salary hikes. Keeping in view of the recommendations of 7th Pay commission, discuss the pros and cons of performance related pay.

Published with inputs from Pushpendra