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People at the top of government get paid two or three times less than they should and people at the bottom of government get paid three or four times more than they should. There is no real system to reward or punish a good or bad job, we have too many people in government, and about 75% of compensation is not salary. Unfortunately most of this will be true even after the sixth pay commission is implemented.

Any vibrant organisation (private, public or non-profit) knows that the sure path to mediocrity is a performance management system that does not create differentiation or what Alexis de Tocqueville called the “fear of falling and hope of rising”. The lack of a credible system to punish and reward performance means that year of joining is the primary metric for promotions. This may be objective but has lower predictive efficacy than palm reacting. I often fought with my “1964″ civil servant father when he identified people by their joining year; one argued that decades of service must throw up more relevant information. I gave up fighting when he explained that, within a batch, the criteria for getting the plum posts dose to retirement was your rank in the entry test over thirty years ago! The weak incentive pay attempt is no substitute for robust evaluations that accelerate performers and must precede private benchmarking.

The labour market distortion by high wages at lower levels (Group C & D that are 88% of employees) will get more acute. A friend and former consultant to the ministry of finance recently ran into his old driver and asked him how things were. The driver said not good because he had been assigned to a joint Secretary who was not nice. So he had outsourced his job; the government pays a driver perhaps four times higher than the public market price of a driver. My friend’s ex-driver recruited a driver from the public market, sent him in to work every day in his place, and pocketed a neat profit off the wage differential (even after the money paid to the payroll department to keep quiet). This applies equally to government teachers, nurses, peons, stenos, etc. We needed salary rationalisation but got a minimum government salary including benefits that is about five times minimum wages.

Recognising the wisdom of Corporate India’s move to cost-to-company (CTC), the sixth pay commission commissioned an XLRI study on calculating cost to-government (CTG) or total compensation. The CTG including benefits is more than three times the salary. For railways the ratio is 3.75 and for armed forces it is 4. Benefits like housing, house building advance, healthcare, indexed pension, etc., should have been monetized and made optional.

Obviously the most important benefit that is impossible to value (but particularly valuable for the mediocre) is job security.

The eleventh finance commission had opposed recurring pay commissions because of the damage to states but now expect a repeat of the 1997 fifth pay commission chaos with weaker state finances. The civil service is too diverse for aggregated raises; future reviews must be nuanced, decoupled and coordinated with the administrative reforms commission.

My father and others joined the civil services because it was the only true meritocracy in town for thirty years after Independence. Corporate India was still run by unimaginative family owners who not only paid and treated professionals sloppily but valued sycophancy over competence. But we are now in a very different labour market with a very different corporate and not-for-profit India. If the government wants to attract and retain top talent it must demonstrate institutional backbone by creating sharper differentiation (within and across grades). Unfortunately, this pay commission fails the best and brightest in government.