Principles of Wage Determination: Chapter IV of NC, JCM Staff Side memorandum submitted to 7th CPC

Chapter IV

The First Pay Commission, which was set up on 1946, submitted their report on 30th April, 1947. Dwelling at length the principle that must govern the determination of salary in civil service, the Commission pointed out the difficulty in adopting the Islington Commission’s suggestions which had been the basis of determination of pay of civil servants in U.K. and the Colonial India. They quoted the criticism, perhaps rightly made, on the dictum of Islington Commission as Ricardian in spirit and based on Capitalistic outlook of 19th century. In sum and substance, the Islington Commission had advocated the law of supply and demand with certain modification, when they said that:

“Govt. should pay so much and so much only to its employees as was necessary to obtain recruits of the right stamp and to maintain them in such degree of comfort and dignity as would shield them from temptation and keep them efficient.”

4.2 The First Pay Commission, though agreed with the criticism, took the stand that the law of supply and demand must not be totally ignored. The Commission concluded (by elaborately dealing with the concept of living wage) that the test formulated by the Islington Commission is to be liberally interpreted and to be qualified by the condition that in no case should a man’s pay be less than the “living wage”. 

4.3 The Second Pay Commission examined various contentions raised before them, viz., supply and demand for labour; Government being treated as a model employer; combining social and economic considerations, fair comparison, factoring the per capita national income, the report of the fair wage committee, etc. In depth the Commission considered the merits and demerits of 

each of the above principles. Some of their comments are relevant for the reappraisal of the principles, which the 7th CPC has been asked to undertake by the Government. 

4.4. On the concept of fair comparison, the 2nd CPC commented that:

At the lowest level on the other hand the outside rates maybe too low for maintaining the efficiency of an employee, even though with so much unemployment and underemployment in the country the Government may have no difficulty in recruitment so long as they pay the central rate. (Para 8 Page 19 2nd CPC)

We may explain that comparison, if instituted, would have to be limited to rates of remuneration and conditions of employment in undertaking known to be giving fair wages; to be following sound employment and management practices and to be generally maintaining good relations with their employees. In other words, the comparison would be with good employers. ( Para 22 Page 26 Chapter IV)

They dismissed the idea of Government being a model employer if that is conceived to make the Government to pay higher wages and salaries than other good employers for comparable work. The Commission feared that the Government acting as a model employer in the above mentioned manner, would be exposed to a well founded criticism of extravagance. (Para 12 Page 20-21 Chapter IV)

They concluded that “while the model employer” principle in the sense explained in Para II is not a sound one, the social principles and standards which government have laid down for or commented to employers generally should be taken into account in determining the emoluments and conditions of service of central government employees.

They reframed from adopting fair comparison with outside rates as a principle suitable for free and detailed application, but recognized it as one of the important factors to be taken into account. They opined that comparison with outside rates should be used as an aid and corrective.

4.5.In the ultimate conclusion of the discussion of various principles for wage determination, the 2nd Pay Commission stated that:

“the social and ethical as well as economic consideration are relevant to the determination of the minimum and maximum salaries, that the internal relativities should be determined with care and should be sound and fair, and that the whole structure of the remuneration and conditions of salaries should be fair to the community as well as to the employees. We have in fact formulated not one but a number of principles. The principles supplement one another: but there is no fixed order in which they are to be applied. There may, in fact, be cases in which the principles, if applied independently would lead to divergent conclusions, but they are not intended to be so applied. We look at the principles essentially as a statement of the basic consideration which have to be taken into account together and harmonised to the utmost extent possible. Further the principles are to be applied against the background – among other circumstances – of the economic conditions in the country and the implications and requirements of developmental planning”.

4.6 The 3rd CPC dealt in detail the various principles of pay determination. They made a critical analysis of each of the principles propounded by the earlier Commissions. Some of the views and principles noted by the 3rd CPC were:

4.7. The 3rd CPC gave primacy to the discussion on the major characteristic of a sound pay structure. According to them, inclusiveness, comprehensibility and adequacy are the pre-requisites of a sound pay structure. By inclusiveness, they meant that the pay structure and career adopted for the civil service proper should also be adopted by autonomous, quasi-governmental organizations. They wanted the pay scale proper should provide a free and comprehensible picture of the total remuneration given to the government employees. They also advocated that the remuneration must be adequate internally and externally. Due cognizance of the individuals attributes and the need to protect a reasonable standard of living were to be taken in to account while determining remuneration. On adequacy of the remuneration they commented that “while it is not argued that the payment of high salaries by itself is a guarantee for the honesty and integrity of the public service, it can confidently be stated that payment of a salary which does not satisfy the minimum reasonable needs of a government servant is a direct invitation to corruption”.

4.8 After examining the various principles, they concluded that while disproportionate importance should not be attached to private salaries, it was nevertheless necessary to take note of the rate of pay and other conditions of service prevalent outside government as a corrective. In particular, they pointed out that since the supply of unskilled labour was abundant, the wages 

to be paid to such workers should be related to essential physiological needs rather than condition of supply and demand. They, as was the case with the 1st and 2nd CPC, rejected the principle that Government should act like a model employer. They found it advisable to bear in mind several principles and conditions while determining the pay structure. They adopted the concept of minimum wage to determine the pay of the lowest level of employees with certain modifications of Dr. Aykroyd formula. In respect of organized Group A services, their primary consideration was to ensure that the terms offered should be attractive enough to enable a person with calibre to make a life time career in the Government. 

4.9 The terms of reference of 4th CPC had not stipulated that commission to go into the principles of pay determination. The government must have thought that the three earlier commissions, having dwelt upon the issue at length and depth, 4th CPC need not be saddled with a repetitive task. However, the 4th CPC took upon itself to effect a re-appraisal of the principles in view of the 42nd amendment effected to the Constitution of India whereby the preamble was amended to incorporate the words “socialist secular” in between sovereign and democratic republic. They stated that the amendment had made a visible change in the complexion of the constitution. They noted that the said amendment was to express a concern for a social welfare of the oppressed, the unfortunate and the disadvantaged. They quoted the Supreme Court to state that the objective was to strive to set up a vibrant ‘’throbbing socialist welfare society” in place of a “wholly feudal exploited” society. 

4.10. They went on to analyse the meaning and purport of the concept of “Living Wage” “Directive principles of state policy” fair wage commission’s recommendations concept of ‘’model employer”, the report of the Megaw Committee of U.K. which inquired in to requirements of civil service of U.K, performance related pay, etc. Some of their observations being relevant are reproduced:

“Principal object in enacting the directive principles appears to have been to set standards of achievements before the legislature and the executive, the local and other authorities”.

“Concept of a living wage is not a static concept, it is expanding and the number of constituents and their respective contents are bound to expand and widen with the development and growth of economy”.

4.11. In para 7.29 of their report, 4th CPC stated that :

“Pay determination is a mixture of the effort to settle the principles as well as the system on which it is based and implemented. The need for it arises for the simple reason that without it the normal rule of supply and demand would operate harshly in a developing economy like ours – particularly as the central government is virtually in the position of a monopolist employer in several fields, in an overflowing labour market. If the inexorable law of supply and demand were to operate, the employer, in a country like ours, would give no more than starvation wage to as many as possible”.

4.12. The 4th CPC justified the periodical wage revision to take note of changes that may have taken place in the relevant facts and circumstances bearing on pay scales but also to rectify or fill any errors or omissions that may have occurred in the earlier pay determination. They also said that such periodical pay revision will avoid conflict with the employer. They also opined that the terms of reference of the pay commission is to be decided in consultation with the employees organizations.

4.13 Their observations can be summarised as under: 

1. Pay structure determination is to be judgemental and not arithmetical or mechanical. It must be based on fair and sound evaluation of the relevant data with the fairest possible mind. 

2. Pay of a post should be such as to attract persons of the required qualifications and calibre to fill it. 

3. Pay should be sufficient and satisfactory. It is in the interest of the Government to make the employee contented. A dishonest employee not only sells his authority away he sets a wrong example, undermines the value of his office, does injustice to others and very often puts Government to financial loss for pittance. 

4. The salary structure should be coherent and should adequately reflect the substantial differences in the nature and responsibilities of various posts. 

5. Efforts should be to provide as far as possible comparable emoluments for comparable work. 

6. To hold out an assurance to the employee that his emoluments will not erode by increase in the cost of living. 

7. Pay scales may not always be enough to fit in every kind or category of employment. We think that a suitable system of “Special Pay” or allowance can take care of such cases. 

8. The capacity of the employer to pay its employees is a factor to reckon with. 

4.14. The 5th CPC which was set up in April 1994 submitted its report in January 1997. The 5th CPC was also asked to evolve principles which should govern the structure of emoluments. In

Chapter 40 under the caption “Pay determination A Conceptual Frame”, the Commission has briefly dealt with the subject. In the initial paragraph itself the Commission stated that the earlier Pay Commissions has gone into the matter with varying result and they do not intend to traverse the same ground. They however, noted certain emerging trends in the functioning of the Government on account of a perceptible change in the economic policies of the government and surmised to state:

(a) Less governance : emphasis will be to facilitate and regulate rather than directly involving in activities. 

(b) Decentralization of Governmental activities due to the strengthening of Panchayat Raj Institutions. 

(c) Right (down) sizing the bureaucracy drastically 

(d) Increased trade union activities of Government employees to force the Government to pay them on par with outside rates. 

(e) Drastic reduction of supporting and auxiliary staff and bring about officer oriented administrative set up. 

(f) Professionalization of Government and consequential jacking up of wages of professionals like Doctors, Scientists, etc. 

4.15 They discussed the concept evolved by the earlier Commissions, viz., characteristics of a sound pay structure, supply and demand considerations, equal pay for equal work, fair comparison, productivity, model employer, etc. 

4.16. On the concept of equal pay for equal wages and to examine the adequacy criterion, the 5th CPC suggested that the Government must set up a permanent Pay Body so that the intrinsic value of job assigned to each cadre could be studied. As a transitory measure they evolved:

“although it is not very scientific or conclusive, we feel that as a primary step towards rationalization, the entry qualification could provide a fairly relative clue.” The pay scales they constructed on the said premise brought about various anomalies which had to be later set right through executive actions.

4.17 On fair comparison concept they concluded that “greater responsibility devolves upon any

Pay Commission to be reasonable and pragmatic and try to bridge the widening gap between the compensation packages of the Central Government and the rest of the economy.

4.18. Apart from the above concepts, the 5th CPC adopted the following criteria in deciding upon the pay structure. 

(a) Intrinsic value of a job 

(b) Linking the smaller entities to larger entities 

(c) To delink pay from the position in the hierarchy 

(d) The need to have similar approach towards the lowest and highest paid functions. 

(e) Actual reimbursement of expenses. 

(f) Capacity of Government to pay 

4.19. Even though the 6th CPC which was set up in October, 2006 was asked to examine the principles that should govern the structure of pay vide the Government’s terms of reference {in No. 5/2/2006-E-III(A) dated 5.10.2006}, the Commission did not attempt an elaborate discussion on the subject as was done by the earlier Pay Commissions. The issue was partially addressed in Chapter 2.1 & Chapter 2.2 (Pages 28 – 70). In Chapter 2.1 the Commission examined comparison with the public and private sectors. They noted that as on 31.3.2006 there had been 245 central PSUs (52 in Schedule A, 87 in Schedule B, 54 in Schedule C and 7 in Schedule D and the rest unclassified) out of 16.49 lakh employees 86% were workers covered by IDA pattern. Among the pay packages in these PSUs the Commission noted: 

(a). In many PSUs pay scales at lower levels are open ended and have percentage based increments. 

(b) Most of the PSUs have introduced performance related incentive scheme.  

(c) DA instalments are quarterly, 

(d) HRA on percentage basis and CCA on Govt. pattern 

(e) Besides, PSU workers are given canteen subsidy, conveyance reimbursement, professional development allowance, night shift allowance, uniform/washing allowance, leave travel concession, etc. 

(f) Interest subsidy scheme on house building allowance, vehicle loan, computer loan, children education assistance and medical benefits. 

4.20 The Commission then came to the conclusion that: 

1. There are variations in job content and service conditions 

2. Objectives of PSU are not comparable with Government. 

3. The autonomy of each PSU makes comparison impossible 

4.21 They ultimately observed that instead of attempting to make any comparison, the Commission would devise a package incorporating the best practices. 

4.22 In respect of private sector comparison the 6th CPC was of the view that the main consideration in the private sector being profit and an equal comparison with the government is impossible. However, taking note of the facts the same pool of manpower provides the source of recruitment and the need to attract the talented persons for Group A and technical posts the Commission finally recommended higher starting salary for Group A posts. The Commission also recommended the introduction of performance related incentive in the Government as was obtaining in the private sector. 

4.23. In consonance with their observations they suggested to have variable increment rate for the Group A officers in pay band which was not acted upon by the government, having felt impracticable. But the higher pay packet suggested to the officers of this level was later improved by the government further.

4.24 In so far as the minimum salary is concerned the 6th CPC relied upon the necessity of computing the same on the 15th ILC norms. But the actual computation was made on a distorted version of the formulae and simultaneously departing from the retail rate of commodities suggested by the Staff Side without indicating what the real rates were on 1.1.2006. The Commission went on to manufacture an artificial rate of retail prices by adding just 20% over the 

whole sale price, thereby depressing the minimum wage by half. Against the Staff Side computation of Rs.10,000/- the 6th CPC worked out a figure of Rs. 5478.5 but adopted another figure of Rs.4860. The Commission inter-alia recommended. 

(a) Contractual appointments 

(b) Running pay bands to avoid stagnation 

(c) Grade pay at 40% of the maximum of the 5th CPC scales as fitment formula. 

(d) Introduce MACP scheme for time bound promotion. 

(e) Recommended full pension after 20 years to facilitate contractual appointments 

(f) Advocated cadre review- which has not been carried out in most of the departments. 

4.25 In fine, we may state that the Commission’s recommendations on pay structure were sans logic and without factoring some of the principles considered by earlier pay commissions. Naturally the acceptance and implementation of the recommendation brought about innumerable anomalies which could not be resolved after repeated discussions in the National anomaly Committee.

4.26 In the succeeding chapters we shall enumerate the reasons as to why 7th CPC should adopt the need based minimum wage formula at the minimum level; the intrinsic value of the assigned job at the intermediary level; the necessity to keep the relativity both at horizontal and vertical level and the need to provide a reasonable salary for the top bureaucrats, taking into account the perks, privileges, benefits, allowances and concessions that go with the posts.