Performance related pay in central public sector enterprises in India.

AuthorSingh, Punam


The public sector enterprises in India have always been considered as 'model employers'. The brightest of candidates dreamt of working for a public sector enterprise. However, with the opening of economy, the situation has taken a u-turn, the public sector enterprises are in a war for talent with its private counterparts. It is not only losing its talent pool to the private sector but fresh talents are more attracted to join private sector or MNCs were there is tremendous career progression along with attractive pay packages. With increase in opportunities, CPSEs are also finding it difficult to retain talented employees. As a result, public sector is under severe pressure in terms of attracting and retaining talent.

Pay has been considered an important reward to motivate the behavior of employees from the very inception of management science (Taylor, 1911) .The linkage between perceptions, pay and performance has been studied and established (Adams, 1963; Vroom, 1964; Lawler, 1971). Compensation serves to attract, retain and motivate high-potential employees. Meanwhile, the fulfillment of above goals is subject to constraints such as the maintenance of equity, cost control and legal requirements (e.g. wage and salary legislation).

"Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship" (Milkovich & Newman, 2005). The phrase "financial returns" refers to an individual's base salary, as well as shortand long-term incentives. "Tangible services and benefits" are such things as insurance, paid vacation and sick days, pension plans, and employee discounts. (Milkovich & Newman, 2005) have used the term compensation and pay interchangeably in their book on compensation management and hence the term pay and compensation is used interchangeable in literature.

Linking pay with performance which is commonly referred as performance related pay has been followed worldwide in all sectors for attracting, motivating and retaining talent. Performance related pay links the compensation of the employees to their performance and their contribution to the organizational goals. Therefore, periodic performance reviews play a vital role and provide the basis for performance related pay. It is because of this reason that the CPSEs have to first develop a transparent and robust Performance Management System before the implementation of PRP in their respective organizations.

CPSEs in India, so far have been following a system wherein the entire compensation was guaranteed, irrespective of the performance of the company or the individual. The second pay revision for CPSEs was accepted by the cabinet on 26th Nov, 2008 to be implemented with retrospect from 1st Jan, 2007.The pay revision had recommended for the implementation of PRP for the first time in the history of public sector enterprises. Since PRP of an individual is based on performance against Key Result Areas (KRAs), all CPSEs should develop a robust and transparent Performance Management System.

Challenges before CPSEs

Intense Competition for Business & Talent: It is widely acknowledged that the public sector enterprises today are required to function in an intensely competitive environment dictated by market forces unleashed especially in the post liberalization phase of the country. The competition faced by the CPSEs from Indian private sector companies and the Multi-National Corporations (MNCs) operating in and outside the country, extends to both business and talent. In sharp contrast to the formative years of the public sector, barring very few exceptions, no Indian CPSE enjoys a product / service monopoly status or a captive consumption facility from its parent ministry / department. In such a situation, the CPSEs have to be as innovative, as ef ficient and as nimble footed the private sector companies and MNCs to successfully compete and win in the market place. Talent--both technical and managerial--becomes the fundamental requirement for such success. The vast differentials in the remuneration, even at the entry level in some cases and at the middle and senior levels in all cases, have made attraction and retention of talent extremely difficult in CPSEs in the last 10-15 years. Engineering and management graduates from IITs and IIMs do not look at CPSEs as a career option today. Same is almost the case with respect to regional engineering colleges and even government engineering colleges. In the 60s & early 70s, CPSEs were the preferred destination for most of the bright and young engineering talent of the country. Probably it is this residual talent, at the helm of the affairs of the Indian CPSEs today, that is contributing to the admirable success of the performing public sector companies of the nation.

Attraction & Retention of Talent : While the junior cadres of management in CPSEs were the targeted community for talent poaching in the earlier years, it is the middle management and senior management personnel who are being lured away in increased numbers now because of the tremendous remuneration gaps between CPSEs and private sector companies & MNCs. The operations of CPSEs are getting very adversely affected in view of this exodus of the experienced and valued cadre of executives of the CPSEs.

It is a fact that the remuneration levels of the entry level executives in CPSEs in some cases are comparable, and sometimes better, to the corresponding emoluments in the private sector. Even such CPSEs are finding it near impossible to attract bright talent. The reasons are twofold: In the earlier times, CPSEs, in a large measure, have been the training platforms for top class Engineering and Management Graduates. In the last one and half to two decades, there are several avenues open to these groups in the private sector companies and MNCs. Secondly and more importantly, the growth opportunities available to the talented ones in the private sector companies and MNCs are far more attractive and rapid compared to the CPSEs.

Therefore, solutions to the problems of 'Attraction' and 'Retention' are increasingly becoming difficult. As things stand, attracting talent is far more difficult compared to retaining talent. For some time to come, till CPSEs become equally attractive destinations to the talented engineering and management graduates, as they were in the sixties and seventies, intensive and specialized inhouse induction and training programs appear to be the only solution. In respect of retention of talent some concrete steps have to be taken to preserve the aggregate knowledge and experience within the preserves of CPSEs to cope with the ever-increasing challenges in the market place.

Uniformity & Differentiation: Barring some exceptions, in the last few years 'Uniformity' has been the guiding principle in respect of remuneration of the executives of CPSEs--with close linkages to the remuneration packages of the Central Government officers. While this linkage had some basis and rationale in the formative periods of CPSEs, the time has certainly come for snapping this linkage and move towards industry standards in respective of the remuneration packages.

As opposed to the 'Uniformity' principle practiced in the CPSEs, 'Differentiation' is the guiding factor for remuneration in the private sector companies and the MNCs. This 'Differentiation' takes place based on several factors like:

* Industrial sector to which the organization belongs

* Functions to be carried out by the executive

* Location of the organization

* Performance level of the executive

* Paying capacity of the organization...

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