Public sector pay: new rules

Public sector pay: new rules

The proposal to link salaries in public sector companies to productivity and performance is a sensible one. A committee headed by former Supreme Court judge M. Jagannadha Rao has slipped this into its report that has recommended hefty pay hikes to managers in government firms.

Privatization has been put on the back-burner. So, it is time to focus on getting better returns on the investments that have been made on behalf of the Indian taxpayer in the public sector.

One major problem faced by these companies is the lack of incentives for senior managers. The days when someone like Prakash Tandon could quit his job as head of Hindustan Lever and take charge of the State Trading Corporation out of a sense of national duty are a distant memory of the old era of Nehruvian idealism. Managers need to be paid more when they deliver better results. There is no reason to believe that this common-sense rule does not hold in the public sector.

But, managers will respond to incentives only when they have a free hand to carry out their duties. How can robust parameters to judge performance be built in companies that are hobbled by ministerial interference? Take the oil marketing companies. They are haemorrhaging because of the obdurate refusal of this government to hike domestic fuel prices. The year-end report cards of the senior managers at the government oil companies will look terrible for no fault of their own.

This is a problem that has been dealt with at length by public choice economists. Political intervention can undercut managerial independence and make performance-linked pay meaningless. The attempt in the late 1990s to insulate some of public sector firms — the Navratnas and the Mini Ratnas — has met with only limited success.

There are pockets of public sector excellence around the world. Think of Singapore Airlines and China’s Baosteel, or our own State Bank of India. But these are exceptions. The general experience since the 1950s has been unambiguous —nationalized companies are not as efficient as their peers in the private sector.

Privatization is inevitably the best alternative. The next best option is paying good money to managers in public sector firms and giving them a free hand so that taxpayer money is not flushed down the drain. The new proposal on performance-linked pay deals with half the problem.

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