The Game is on Again -- Part I

The Seventh Pay Commission is not only likely to lead to a 250-300% hike, but so cleverly is the system rigged that it will also, most likely, include a 15% Performance Related Incentive for government employees; actual performance be damned.

A new version of a very interesting bureaucratic game was kicked off on September 26, when Indian Finance Minister P Chidambaram announced the formation of the seventh Central Pay Commission (CPC). Over the next two to three years, it will go through extremely interesting twists and turns till reaches its final denouement sometime in 2016.

It will have a lot of high drama, employees unions making demands and threatening with strikes, economists decrying the additional burden on the exchequer, politicians weighing in and accusing each other of using the process towards political ends etc. But the match is already fixed. The result is more or less a foregone conclusion – Indian government employees will get a pay hike that is anywhere between 250-300% of their current pay. How can I be so certain of these numbers? Here is an interesting analysis done by – of all the people – the Indian Railway Technical Supervisors Association (IRTSA), a union of the technical supervisory staff of the railways.

What will be the impact of this potential pay hike on the Indian government’s finances and the fiscal deficit? Does the cash strapped Indian government even have the wherewithal to pay its bloated work force these hiked salaries? Will the announcement of setting up the seventh CPC a few months before the general elections help the incumbent government? These are all separate discussions left for a future date.

This post is about how the system is being gamed in a systematic manner. The sheer bureaucratic genius involved makes Antony Jay and Jonathan Lynn – creators of the world famous Yes Minister and Yes Prime Minister series – look like bumbling novices. And this relates to Performance Related Incentive Scheme for the Indian Government employees.

Now anyone who has had any brush with the Indian government or in fact any government body in India – Central, state or local – will tell you that you cannot mention “Indian government” and “performance or efficiency” is the same sentence. It is not just wrong on facts, but so fundamentally wrong that perhaps the rules of grammar will allow you to use those words together!

No one in his right mind can accuse the Indian Government of efficiency

So where is this Performance Related Incentive Scheme coming from? What will be its impact? Will it actually – incredible though it may sound, improve Indian government’s performance?

To understand all these issues let’s get some background.

Background

The Indian government constitutes a CPC every decade to revise pay scales of its employees. The salary of an Indian government employee consists of two main components – a base pay that typically constitutes about 60% of the salary and inflation linked allowances under various heads that constitute about 40%. While the inflation-linked allowances are revised twice a year, the base pay grades remain constant, till they are revised by a CPC.

While the CPC only decides on pay revision of the central government employees, its recommendations are used as a basis by state government and various other government and quasi-government bodies to revise the pay scales of their employees.

Together these constitute a significant percentage of the voter base. Indian government employs about eight million people – in military as well as civilian spheres. Various state governments, public sector enterprises owned both by the central and state governments and other quasi-government and local government bodies employ almost a similar number of people. These 16 million or so direct beneficiaries are able to influence the vote of almost 60-70 million voters (through family and friends); which constitutes almost 10% of the total Indian electorate. So any political party in power in the centre can draw significant political mileage from loosening is purse strings for its employees.

Keeping these simple facts in mind, let us return to the interesting bureaucratic game that is going to be played out over the next couple of years.

Recommendations of the sixth CPC

The last CPC – the sixth such commission – was constituted in 2006 and gave its report in 2008. It recommended an across the board base pay hike ranging from 250% to 330%.

The impact of these pay hikes has been devastating. According to the Economic Times, the world’s largest selling business daily, the Indian government salary and pension bill for its civilian employees – 42% of the total government workforce -- was about Rs. 686 billion in FY08. It has since gone up to an estimated Rs. 1.92 trillion by FY14. (In India the financial year is between April 1 of that year and March 31 of the subsequent year). This is a rise of 180% in six years. (See ET’s report here.)

The level of minutiae that a CPC goes into has to be seen to be believed. Indian government employees are divided in 34 different grades – from the lowest ranked helpers etc. to the highest ranked Cabinet Secretary. Then there are different kinds of services from administrative to medical, to engineering to scientific. There are different allowances that range from the standard such as Dearness Allowance, Leave Travel Allowance, City Compensatory Allowance, Overtime, Allowance for being posted outside the headquarters, allowance for being on deputation to a different city, a different post etc. Incidentally all these allowances are inflation indexed.

By the way the above description is only of the pay and allowances of the civilian government staff. The details involved in the pay and allowance of the Defence Services is completely different level of complexity altogether.

Little surprise than that a CPC report is a voluminous document. The Sixth CPC report, including an annexure was over a 1,000 pages long. This was then followed by literally hundreds of other notifications, rules, circulars etc. that the government brought out.

Tucked away in all these pages was one innocuous looking chapter/subsection in the Sixth CPC report. It was titled Performance Related Incentive Scheme. The chapter was only about 13 pages long – the annexure to the report dealt with the topic on at slightly greater length, all of 40 pages.

This chapter/section had its origins in one of the Terms of Reference of the Sixth CPC related to fixing a framework for Performance Related Pay (PRP). To do this, the Commission took the help of Indian Institute of Management, Ahmedabad (IIM – A) to help them devise a structure.

IIM - A after studying various PRP models in governments across the world as well in the private sector, observed, “For a larger (majority) section of (government) employees there is hardly any performance for pay incentive available to them. Their salaries are today only a composite of basic pay plus certain allowances (variable) including DA that are admissible depending on the nature of jobs and duties and accompanying working conditions. In fact, natural increases in salary are very much guaranteed to Government employees. This leads to a situation where employees do not exert themselves for a higher level of on-the-job performance and achievements, thus depriving the Government of potential productivity gains and service delivery enhancements, both in terms of quantum and quality.”

After studying this report and other submissions, the Sixth CPC came out with this recommendation. “the Commission recommends introduction of a new performance based pecuniary benefit, over and above the regular salary, for the Government employees. The benefit will be called Performance Related Incentive Scheme (PRIS) and will be payable taking into account the performance of the employee during the period under consideration. It is based on the principle of differential reward for differential performance.”

Notice anything? Performance Related Pay (PRP) has in the Sixth CPC’s hand become Performance Related Incentive Scheme (PRIS). The difference this subtle change in nomenclature makes is huge. PRP would mean that someone doesn’t perform up to the benchmarked standards; he/she will get lesser amount of the variable component. This is the way the private sector works. But PRIS means that if an employee’s performance is above the benchmark, he/she gets additional pay. There is no penalty for non-performance.

In order to leave out no ambiguity about which route the CPC wanted to take, the report went further and made it explicit. “To ensure that employees do not lose any of their regular salary as revised by this Commission in case they are found ineligible for this incentive; the Commission proposes to pay this incentive over and above the regular pay of the employee. In this sense, the incentive being recommended in this Report is different from Performance Related Pay (PRP) in other countries as, unlike in PRP; it is a benefit over and above the regular pay of the employee.”

It is almost certain that the Seventh Pay Commission will recommend a 15% Performance Related Incentive for Indian Government employees. Actual performance be damned.

So if a clerk in a government department routinely walks in at 11.00 AM and goes home at 4.00 PM, not counting the time he spends on lunch, tea, paan etc. and generally performs at a 30-40% capacity, his pay is not docked. He gets is full pay and allowances as well as annual increments.

Now admittedly, the Indian government is like an ocean going super tanker – you can’t turn it around on a dime. It requires a huge amount of time, distance and effort to turn the ship around. The Sixth CPC acknowledged this. It also pointed out that measurement of performance in the government has to be different than in the private sector, where it could be linked to profits.

“In the Governmental context, performance can be defined as the ability of the Government to acquire resources and to put these resources to their most efficient use (input-output relationship) and to achieve the desired outputs and outcome goals (output-outcome relationship). It is the shift from inputs-process emphasis (efficiency) to results, social goals and outcomes (effectiveness). Performance can, in the final analysis, only be viewed in terms of the final deliverables to the user/stakeholder,” the Commission observed. It also pointed out that definitions of performance would necessarily be different in different government departments. Therefore while recommending the adoption of PRIS; the Sixth CPC suggested that the government work out the methodology of how it is to work in different departments and situations.

When the Government accepted the Sixth CPC report, in 2008, in toto, it left the door open for another fraud to be perpetuated on the Indian people in the name of Performance Related Incentives. Work on that, within the bureaucracy started the very next financial year.

For details of how carefully and beautifully the system is being rigged to ensure that practically every government employee becomes eligible for PRIS; resulting in an additional burden of about USD 40-45 billion per year -- actual performance related impact on the ground be damned -- read my next blog post.