What is the role of a pay commission? | Explained

The story so far:

TThe central government constituted the 8th Central Pay Commission (CPC) under the chairmanship of retired Justice Ranjana Prakash Desai. It consists of Professor Pulak Ghosh, who is also a faculty member at IIM Bangalore as a part-time member, and Pankaj Jain IAS, Secretary to the Government of India, as member-secretary. It will submit its report within 18 months.

What is wage commission?

In India, salary commissions are established by an administrative order based on a decision of the Council of Ministers. The role of the CPC is to examine various issues relating to salary structures, retirement benefits and other conditions of service of Central government employees, including defense personnel, and make appropriate recommendations on necessary changes. The first CPC was established in 1946.

What are the terms of reference?

Terms of Reference (TOR) of wage commissions are finalized by the Union Cabinet. 8. The CPC’s Terms of Reference require that certain factors be taken into account when making recommendations. These include the country’s economic conditions and the need for fiscal prudence; the need to ensure adequate resources for development expenditure and welfare measures; the unfunded cost of noncontributory retirement plans; The impact of recommendations, generally adopting those of the CPC, on State government finances; and the prevailing wage structure and working conditions for central public sector enterprises and private sector employees.

What are the international practices?

Globally, until the 1970s, the pay system for the public sector aimed to ensure equality by comparing them with similar roles in the private employment market. In the 1980s, efficiency replaced equality as the basic principle in determining remuneration. Since the 1990s, performance and incentive, balanced with affordability, have become the basic principle. Currently, public sector remuneration systems are evolving to recruit and retain people with appropriate competencies and skills while trying to contain the overall cost to the public exchequer.

By global standards, the key characteristics of fair compensation in the public sector are open philosophy, ability to attract talent, internal equity, external competitiveness and openness. While adequate emphasis is given to domestic capital in India, external competitiveness lags behind when it comes to compensating for top positions.

Some comparative data for major democracies on specific parameters of public sector employment, summarized in Table 1, are noteworthy. While the general perception in our country is that public sector employment and wages are huge and with limited productivity, they are lower in almost all parameters when compared to other major democracies.

What’s next?

There are some important aspects of the Terms of Reference that need attention. First, the Terms of Reference require the CPC to compare the pay structure of the public sector with that of the private sector. This situation was even discussed in previous payment commissions. While entry-level positions in the public sector have significantly higher salaries than their counterparts in the private sector, the opposite is the case for higher positions and specialist roles. The compression ratio, i.e. the ratio of lowest to highest salaries in the Central government, was fixed at 1:12.5 in the seventh CCP. Perks and perks, combined with job security, are an important intangible asset that compensates for lower pay packages in senior government posts. But this needs to be revisited in terms of specific senior roles and specialist roles to attract and retain talent. Secondly, intangible assets such as learning and development, training and the work environment, including flexible working and health promotion, are not part of the Terms of Reference. The Commission can be expected to address these issues in its final report.

Finally, the 8th CPC was given the authority to take into account economic conditions, the need to provide adequate resources for welfare, and the unfunded costs of non-contributory pension plans. The pension bill for 2025-26 is estimated at ₹2.76 lakh crore out of the central government’s total revenue expenditure of ₹39.44 lakh crore. When making recommendations, the impact of non-contributory pension plans on the state treasury should be kept in mind. But welfare measures are political decisions that continue to evolve. New programs are announced by the center from time to time. Given these factors, it may be possible that a commission that includes members from the judiciary, academia and the bureaucracy may not be equipped to assess impact. It may also be possible for the commission to be based on a broad base of finance and human resources professionals and to present different opinions.

Rangarajan R is a former IAS officer and the author of ‘Simplified Courseware on Politics’. Currently the Officers are undergoing training at the IAS academy. The views expressed are personal.