High salaries attract people to PSUs?

When a committee tasked with deciding the pay hikes of public sector managers prefaces its report by saying that it hopes this is the last time any committee is set up to do the job, it is time to sit up and take notice.

As opposed to the current practice of the government fixing wages for state-owned enterprises every 10 years, the committee headed by the retired Supreme Court judge, M Jagannadha Rao, has recommended that the ministry in charge of an enterprise be involved in fixing the chief executive's salary; the enterprise board can then fix everyone else's salary - a proposal that basically decentralises decision-making and gives enterprises much greater operating freedom.

Today's "one size fits all" approach of determining pay levels for senior functionaries uniformly, with variations only for the size of the company, is at odds with the reality that salary levels in different industries and across functions in the same company need to be different.

The question is how greater operational freedom is to be melded into a larger pattern for state-owned enterprises, which typically pay less than their private sector counterparts. There is also the question of why, if salaries can be left to boards to decide, senior appointments cannot also be done by boards instead of being referred to the Public Enterprises Selection Board.

One danger in decentralisation is that individual ministers might want to appoint favourite sons, and the country has seen that the coalition style of governance seems to permit little control over ministerial conduct. In other words, decentralisation will have to be done carefully and in measured doses, with appropriate safeguards.

Meanwhile, the headline news is that the committee has recommended pay hikes ranging between 57 per cent and 379 per cent, but this is not the most important of the sweeping changes recommended. Essentially, the framework of thought is that state-owned enterprises have to compete with private sector firms, and that should be the operating principle rather than parity with salaries paid to bureaucrats (who are administrators, not managers taking risks).

And so the committee recommends broad guidelines for fixing performance-related pay and links these with the profitability of the units. So, if a company is profitable, let it pay more; if it is not, then its staffers will get only the fixed portion of the salary.

This seems logical and simple, but can raise other questions. For instance, should the operating principle be profits alone, or improvement in profitability on a given base? And what about performing better or worse than others in the same market? In other words, performance has to be appropriately defined. The framework for this already exists in terms of the memoranda of understanding that state-owned firms sign with their controlling ministries every year.

Indeed, CEOs are routinely rated on their performance, with the MoU being the benchmark. In one sense, all that needs to be done is to link this performance rating to pay and bonuses.

There are many issues that will have to be resolved before the committee's recommendations can be translated into practice. First, the backlash from clubby bureaucrats from the elite all-India services will have to be dealt with. Then, the experiment with a more flexible system and variable pay based on performance should not be introduced across the board, but tried out in a dozen or two enterprises, to see how it works in practice.

The possibility of trade union pressure to match workers' salary increases with those for managers should be anticipated, and a suitable response planned out beforehand. Finally, the proof of the pudding will have to be in the eating - do better financial rewards attract men and women of superior ability to work in state-owned companies? The experiment will have been worth it only if it does.

The sixth pay commission: Complete coverage