Daniyal Aziz

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RECURRENT BUDGETS AND INSTITUTIONAL CHANGE
by Daniyal Aziz GINI, Islamabad-Pakistan
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PRESENTATION SEQUENCE

• SURVEY OF THEORIES ON MONEY MOTIVATION
• ELEMENTS OF THE NEW INSTITUTIONAL ECONOMICS
• THE TRANSPLANT EFFECT
• ORIGINS OF SALARY DETERMINATION
• HISTORICAL EVOLUTION OF SALARY STRUCTURE OF
  PUBLIC EMPLOYEES IN SUBCONTINENT / PAKISTAN
• GRAPHS
• REAL VALUE OF SALARIES 1972-2006
• COMPARISON OF SALARIES FROM 1914 to 2006 OF
  VARIOUS REMUNERATION PACKAGES

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PRESENTATION SEQUENCE

• INTRODUCTION OF SPECIAL GRADES, MULTIPLE
  ALLOWANCES, PERQUISITES AND PAY PACKAGES
• WORLD BANK OBSERVATIONS ON SALARY AND CORRUPTION
• A NEW APPROACH
• THOUGHTS ON COUNTRY ASSISTANCE STRATEGIES

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SURVEY OF THEORIES ON MONEY MOTIVATION
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SURVEY OF THEORIES ON MONEY MOTIVATION

• Traditional wage theory regards maximization of
  profit as the goal of all individuals and measure
  motivation in terms of wages / salaries
• This is too simple an explanation and salary
  structure of an organization cannot be based on
  this naïve assumption
• F.W. Taylors motivational theory which became
  known as scientific management found that
  material rewards were closely related to work
  efforts. He and his associates had little doubt
  that once the best working procedure was taught
  to the worker and his pay was tied to his output,
  maximum effort would be available
• Hawthorns experiments on the first time brought
  forward the importance of non-economic rewards
  and social determinants of output

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SURVEY OF THEORIES OF MONEY MOTIVATION

• Max Weber realized the importance of salaries
  but in his construct the chief instrument to
  induce people to work for the organization was
  the concept of authority legitimized by the value
  system of the organization
• Chester I. Barnard considered material rewards,
  wages / promotion as a basic factor in
  motivating individuals to work for the
  organization
• Chris Argyris places an emphasis on
  self-actualization as the primary element in
  motivation
• Amitai Etzioni has formulated typology of
  organization based on the kind of compliance they
  require which are
• (1) utilitarian, (2) coercive, and (3) normative
• Remuneration is the major means of control in
  utilitarian organization particularly for the
  blue-collar workers. White- collar workers are
  predominantly controlled by remuneration means,
  but less so than blue-collar workers

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SURVEY OF THEORIES OF MONEY MOTIVATION

• Normative controls play an important role
• Rensis Likert suggests that motivation can be
  fostered by modifying the structure of the
  organization. Instead of hierarchical relations,
  he suggests supportive relationships.
  Hierarchical decision-making is replaced by group
  decision-making
• Daniel Katz distinguishes between intrinsic
  incentives, such as nature of job and
  internalization of goals, and external rewards,
  such as salary and promotion etc. Emphasis that
  money incentive primarily attract people into
  organizations rather than energizing them toward
  organizational goals once they are in the system.
  
• Fred Munson endorses this theory by observing no
  doubt, people work for money, but it does not
  follow that they would work harder for more money

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SURVEY OF THEORIES OF MONEY MOTIVATION

• Taking queue from the same theory developed the
  theory of comprehensive Hierarchy of Needs from
  the physiological and safety needs to the
  psychological needs of belonging, esteem
  self-fulfillment
• Growing tendency among the writers in the area of
  organizational theory to down-grade the
  importance of money as an incentive
• R. Doberstein observes that the money incentives
  do not fulfil the needs of the whole man which go
  much beyond the elemental needs
• Harold E. Roth enumerates such other determinants
  of motivation as size of the work group, inherent
  nature of the job and length of time involved
  besides financial attraction
• Dale S. Beech describes the disillusionment with
  the wage incentive, but suggests there is hardly
  any other alternative which does not have its
  faults

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SURVEY OF THEORIES OF MONEY MOTIVATION

• Herzbergs theory of motivation has been an
  important influence on thinking on the subject.
  Distinguishes between two types of factors (1)
  Satisfiers factors directly concerned with the
  job and (2) Hygiene factors concerned only
  with the setting of the context of the job. Among
  former are included recognition, achievement,
  nature of work, while in the later are included
  salary, status, working conditions etc.
• Whether a particular type of incentive is more
  important or less, is to be decided by the
  organization but an overall incentive system is
  central to the organizational activity. It may,
  however, be pointed out that the present wage
  theory hardly touches the problem of pay
  determination. It may provide some guidelines for
  the pay determination at the entry levels. It
  does not provide any basis for building the
  internal pay structure. Neglects important
  factors as security of tenure, prestige and
  status. In short, pay determination tends to
  remain a process of muddling through

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ELEMENTS OF THE NEW INSTITUTIONAL ECONOMICS
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ELEMENTS OF THE NEW INSTITUTIONAL ECONOMICS

• The New Institutional Economics through path
  dependency theorem establishes the critical
  importance of change over time.
• Advances in credible commitments and incentives
  (e.g. cash) promote that pricing and
  administration of incentives is critical to
  alternative contract enforcement or behavior
  modification (Oliver Williamson).
• Also, the institutions regulating transactions
  set the rules of the game as referees, rather
  than players and therefore, occupy a higher
  importance.
• Critically, that institutions consist of formal
  and informal rules (culture) and that formal
  rules can be easily changed but informal rules
  change slowly, incrementally on the basis of
  incentives (positive or negative) over time
  (North).

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THE TRANSPLANT EFFECT
BY Daniel Berkowitz, Department of Economics,
University of Pittsburgh, Pittsburgh, PA, USA,
And Davidson Institute, University of
Michigan Katharina Pistor, Kennedy School of
Government, Harvard University, Cambridge,
MA Jean-Francois Richard, Department of
Economics, University of Pittsburgh, Pittsburgh,
PA, USA January 2001
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THE TRANSPLANT EFFECT

• In post-colonial societies the institutional
  construct of relations between the formal and
  informal nature of institutions is more complex
  due to what is called The Transplant Effect
  (Berkowitz, Pistor, Richard, 2001) (legal and
  administrative systems that are imported and
  grafted on a native population).
• In this type of historical context, incentives
  could require premiums (added incentives)
  associated with inducing a pure adoption of the
  formal (foreign) as it is more deviant from the
  informal (local custom/culture).

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ORIGINS OF SALARY DETERMINATION
REFORMS OF CORNWALLIS
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SOME QUOTES
Reforms of Cornwallis
The Resident, although not regularly
invested with any power, enjoyed the almost
absolute government of the country without
control. His emoluments, besides the thousand
rupee per month allowed him by the Company,
certainly amounted to little less than four lacs
a year, exclusive of the complete monopoly of the
whole commerce of the country..
Duncan, however, had to be content with a fixed
salary of Rs. 5,000 a month and to forego the
irregular emoluments of his predecessor.
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Some Quotes
Reforms of Cornwallis
The wretched policy of the Company has
invariably driven all their servants to the
alternative of starving or of taking what was not
their own. I shall never think it a wise
measure in in this country to place men in great
and responsible situations, where the prosperity
of our affairs must depend on their exertions as
well as integrity, without giving them the means,
in a number of years, of acquiring honestly and
openly a moderate fortune..
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Some Quotes
Reforms of Cornwallis
.and salaries alone were paid, but at generous
rates, so that Collectors drew Rs. 2,000-4,000 a
month. The Directors were not inclined to
approve, believing that in the demoralising
atmosphere of India the Companys servants,
however, well paid, would make money dishonestly.
Cornwallis trenchantly observed It is maxim
that no Government can command honest services,
and that pay our servants as we please they will
equally cheat, the sooner we leave this country
the better. I am sure under that supposition I
can be of no use, and my salary is so much thrown
away.
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Some Quotes
Reforms of Cornwallis
Collectors were drawing Rs.1,200 a month when
Cornwallis took office. He raised this to
Rs.1,500. . gaudy dreams of sudden-acquired
wealth that for twenty-five years had dazzled
the Companys servants, and their replacement by
patient expectations of growing fortunes.
Corruption in various forms lingered on for many
years, but it ceased to be so widespread, blatant
and generally accepted as a necessary evil.
Cornwallis himself believed that his efforts to
persuade the Companys servants to be more
economical in their mode of living, and to look
forward to a moderate competency were not in
vain but, he added, if all chance of saving any
money and returning to England, without acting
dishonestly, is removed, there will be an end to
my reformation.
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HISTORICAL EVOLUTION OF SALARY STRUCTURE OF
PUBLIC EMPLOYEES IN THE SUBCONTINENT/PAKISTAN
HISTORICAL PERSPECTIVE
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HISTORICAL EVOLUTION OF SALARY STRUCTURE
Atchison Commission in 1886

• First large scale probe into service matters.
  Recommended determination of salaries on the
  following principles-
• Salary of persons engaged on work of equal
  importance and degree of responsibility could be
  paid differently on the basis of source of
  recruitment foreign - local
• Different scales of pay can be fixed for even
  locally recruited persons in India based on
  varied conditions obtaining in different
  provinces
• Based on the above principles number of grades of
  pay for each post were established, e.g.,
  District and Sessions Judge, 5 grades DC 4-7
  SP/ASP 3-5 technical and other services 1-3 and
  so on
• System remained in place till 1920

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
Islington Commission in 1912-15 (Report delayed
till 1919)

• Recommended
• pay so much and so much only to have recruits of
  right stamp and to maintain them in a degree of
  comfort and dignity.
• Could not fully remove difference of pay on the
  basis of source of recruitment
• Instead of multiple grades system of pay
  recommended introduction of system of Pay Scales
  having Min-Max, annual fixed increment and
  Efficiency Bars (EB)

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
1920-23 Post War Period

• Post war period saw 10 cut in salaries for four
  years consecutively to meet the challenges of
  economic crunch

1924

• New Pay Scales introduced fixing salary on
  service/function classification
• Major services formed each one having further
  functional / departmental classification
• Rate of salaries on the basis of year of
  service
• Each post had basic pay which increased annually,
  lower Selection/Higher Grades reached after
  around 20 to 25 years of service

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
1931

• Economic slump pay scales reduced by 20 in the
  Minimum and almost 30 in Maximum
• ICS and certain other services allowed to retain
  in the existing scales

1933

• Retrenchment Committee for the Reduction of Pay
  made recommendations for new Time Scales for
  various services
• The Senior Scales different on the basis of
  posting. SP ordinary district Rs. 750 while SP
  Multan, Ferozepur, Sialkot etc in scale of Rs.
  1,000-1,200. Commissioner of Lahore and Amritsar
  Rs. 1,500 etc.
• Class-II services in Edu, Agri, Vet, Med, Eng,
  and Coopr. etc. grouped together for purposes of
  salary

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
1933

• Cadre having 100 or more posts had Prize Posts
  equivalent to 5 of the Cadre which carried
  selection grades higher than ordinary grades.
• Two EBs introduced in each scale one near the
  commencement of service and the other at
  approximately the 18th year of service

2nd World War

• Major diversion of consumer goods from civilian
  to military uses and Bengal famine had a most
  disturbing effect on the fixed income group
  particularly government servants
• Government devised ad-hoc scales and provided
  War Allowance to its employees
• New unified scale for clerical establishment

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
2nd World War

• Govts of Punjab and Sind made wholesale upward
  revision of pay scales, but their employees
  condition did not improve which resulted in award
  of Grain Allowance and Dearness Allowance in
  1940, 1942 and 1944 without change in the pay
  structure

1946-47

• Salaries of public employees continued downward
  slide. Central Pay Commission 1946 under Sir
  Srinivasa established
• Commission expressed reservation on the
  Islingtons principle of payment of so much as
  was necessary and laid down criterion of payment
  of not less than minimum wage and also taking
  into account qualification, training of the
  individual and responsibilities of the job

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
1946-47

• Report of the Commission came prior to partition.
  Government of India accepted the report.
  Government of Pakistan did not accept it on
  account of radically changed ground realities and
  smaller economic base

1947-49

• In 1948 Pay Commission established under Mr.
  Justice M. Munir determined the following broad
  principles-
• inherited pay scales of higher posts were
  un-justifiably high
• the country was left with very small tax base and
  had to keep the non-development expenditure at
  the minimum possible level

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HISTORICAL EVOLUTION OF SALARY STRUCTURE

• the living standard of low-paid employees was to
  be raised
• the State need not offer such salaries as would
  attract the best available material
  the correct place for our men of genius was in
  private enterprise
• Prices would soon come down

1947-48

• The Commission divided public employees into 30
  broad categories suggested as many standard
  scales introduced from January, 1949
• Main feature was reduction in the salaries of all
  categories of employees

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
1959-62 - Justice A.R. Cornelius

• Proposed new 7 tier structure for the services
  with 3-5 grades of pay under each group
• Neither the Service Structure nor the Pay Code
  recommended by the Commission was accepted
• 1949 Prescribed Scales of Pay nonetheless
  replaced by Revised Prescribed Scales of Pay in
  1962 to offset ever- increasing inflationary
  pressures
• 1969 Ad-hoc relief sanctioned to all
  non-gazetted employees, _at_ 10, 15 and 20 of pay

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
1972 - Mr. Mumtaz Hassan

• Rise in prices continued
• CPI rose by 30 since last raise in salaries
• Introduced 22 National Pay Scales covering all
  Federal and Provincial employees as against 622
  pre-reform pay grades which were adjusted as
  under-

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
1972 Mr. Mumtaz Hassan

• Creation of new scales, addition and alteration
  in the scales banned, and selection grades,
  special/technical pays abolished.
• Anomalies
• Insufficiency and inadequacy became apparent soon
  after the launching of the scheme
• Year 1972 began with serious inflationary
  pressure, devaluation, floods, monetary
  expansion, use of oil as weapon and consequent
  price spiral aggravated the situation
• Instead of addressing congenital defects of the
  scheme, government started tampering with the
  scheme
• Five (5) advance increments sanctioned for
  engineers, doctors and lecturers. Dearness
  allowance sanctioned during 1973, 1974 and 1975
  to supplement the income of public employees

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HISTORICAL EVOLUTION OF SALARY STRUCTURE

• Anomalies
• Sanctioning successive allowances made the first
  7 to 8 scales redundant
• Lumping of various positions in one of the 22
  scales posed problems in maintenances of
  hierarchies and overlapping of scales brought out
  structural deficiencies
• Overlapping generated equal pay for different
  posts which is against the principle of wages
  according to responsibilities

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HISTORICAL EVOLUTION OF SALARY STRUCTURE
Post-1972

• Seven Pay Commissions / Committees formed and
  salaries revised nine times without any
  structural changes but mainly to offset the
  inflation and check erosion of the real value
• Despite nominal increase of wages, real value of
  the wages have gone down substantially
• The wages have been supplemented indirectly
  through introduction of special scales grades,
  perks privileges and allowances etc. for
  certain jobs positions and organization which are
  more of discriminatory and have generated
  disparities and variations in the compensation
  package of various classes of public employees in
  Pakistan.

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GRAPHS COMPARISON OF SALARY FROM 1914 TO
2006 REAL VALUE OF SALARIES 1972-2006
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REAL VALUE OF SALARIES 1972-2006
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REAL VALUE OF SALARIES 1972-2006
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GRAPHS COMPARISON OF SALARY FROM 1914 TO
2006 COMPARISON OF VARIOUS SALARIES FROM 1914
to 2006 OF
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COMPARISON OF SALARY FROM 1914 TO 2006
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COMPARISON OF SALARY FROM 1914 TO 2006
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COMPARISON OF SALARY FROM 1914 TO 2006
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COMPARISON OF SALARY FROM 1914 TO 2006
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COMPARISON OF SALARY FROM 1914 TO 2006
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COMPARISON OF SALARY FROM 1914 TO 2006
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COMPARISON OF SALARY FROM 1914 TO 2006
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COMPARISON OF SALARY FROM 1914 TO 2006
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GRAPHS REMUNERATION PACKAGES
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INTRODUCTION OF SPECIAL GRADES, MULTIPLE
ALLOWANCES, PERQUISITES AND PAY PACKAGES
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INTRODUCTION OF SPECIAL GRADES, MULTIPLE
ALLOWANCES, PERQUISITES AND PAY PACKAGES

• Negated fundamental rationality affected the
  National Pay Scales 1972 as under-
• Created income disparities between various groups
  of employees.
• Brought out the insufficiency and adequacy of the
  scheme to meet the requirements of a whole range
  of public administration.
• Militated against the norms of equality and fair
  play.
• Brought demoralization among public servants.
  

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1. SPECIAL GRADES
i) Management Grades

• In 1983, Management grades for senior executives
  of corporations, autonomous/semi-autonomous
  bodies of public sector enterprises were
  introduced which were higher than wide difference
  with National Pay Scales.

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ii) MP Grades

• Introduced in 1998 for appointment on contract
  basis of professionals from the private sector
  against top management positions in the public
  sector organizations.
• Subsequently, also allowed to Government Servants
  in 2001, who competed with the private sector
  professionals and severed their lien with the
  parent cadre.
• At the time of their introduction MP Grades were
  as follows-

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These MP Grades are revised (upgraded) by 63 in
year 2007
BPS-22 BPS-21 BPS-20 20,055-1,440-40,215 18,750
-1,230-35,970 16,915-1,095-32,245
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MP Grades

• Post in selected Government Departments being
  given MP Grades against the spirit of the scheme
• Government servants also being appointed against
  these grades without complete severance of their
  lien with parent cadre.
• Contractual periods being extended as a matter of
  routine.
• Recruitment outside the purview of FPSC.

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2. ALLOWANCES i) Project Allowance

• In 2005 Project Allowance to officers working on
  foreign funded social sector projects were
  granted at following rates-
• BPS 20-21 Rs. 50,000/- per month
• BPS 19 Rs. 40,000/- per month
• BPS 17-18 Rs. 30,000/- per month
• Allowed to Government servants selected through
  open competition and not to civil servants posted
  on transfer.
• All project posts not advertised.
• Generated discrimination.
• Two sets of civil servants doing the same work
  being paid differently.

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ii) Various other Allowances
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3. SPECIAL PERQUISITES /ALLOWANCES
i) President / Prime Ministers Secretariats,
their attached organizations PMIC, NSC, NAB, NRB
etc.

• 10-15 Presidency Allowance.
• Full utility charges re-imbursements.
• Non-deduction of 5 House Rent Charges

• Responsibilities of each organization of state
  carry same importance.
• Government servant liable to serve wherever
  posted.

• (ii) (Supreme Court, High Court Federal Shariat
  Court)
• Special Judicial Allowance _at_ 20 of basic pay.
• Office holders of particular professions/categorie
  s not entitled to get extra allowance for
  performing responsibilities of their calling.

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iii) National Assembly / Senate
Secretariat/Parliamentary Affairs Division

• Sessional Allowance_at_ 50 (Session including
  seven days immediately preceding the commencing
  and seven days immediately following the
  prorogation of the session).
• Conveyance diet charges _at_ Rs.160/- per day.
• Two special honoraria.
• Powers of financial regulation outside normal
  financial regime of the Federal Government.

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iv) Central Board of Revenue

• Special allowance equivalent to 100 of the basic
  salary allowed to the selected employees of the
  CBR.
• Shows weakness of the Personnel System in as much
  as certain employees are being rated more
  efficient than the others.
• Creates inequities motivation and morale
  problem.

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v) Training Institutes

• A special pay package has been proposed for the
  officers/faculty of the National School of Public
  Policy (NSPP).
• Instructional Allowance _at_ 20 of basic pay in all
  training institutes.
• Government servants liable to serve wherever
  posted.

vi) National Highway / Motorway
Police/Islamabad Model Traffic Police

• Allowance equal to one extra pay on monthly
  basis.
• House rent ceiling paid in cash.

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vii) FIA (Special Investigation Group SIG)

• Special allowance to each Government Servant
  equal to his basic pay per month.
• Special Allowance _at_ 60 of basic pay to Female
  ASIs performing immigration duties at the
  International Airports.

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4. DIFFERENT PAY PACKAGES
i) Tenure Track System for appointment of
faculty members in public universities.
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PUBLIC UNIVERSITIES
ii) NUST
iii) FOREIGN FACULTY HIRING PROGRAMME UNDER HEC
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PRIVILEGED ORGANIZATIONS
5. PUBLIC SECTOR ORGANIZATIONS
i) Security Exchange of Pakistan (SECP)
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ii) Pakistan Telecommunication Company Ltd
(PTCL)

• 35 increase in pay to be given to employees in
  BPS-1 to BPS-16 (Non-Gazetted).
• 20 increase in pay of employees who have been
  hired on new terms and conditions.
• Again, PTCL vide its Inter Office Memo dated
  5-10-2005 approved 15 increase in pay of all
  PTCL regular gazetted employees (BPS-17 above
  including BPS-16 gazetted only) with effect from
  1-7-2005.

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iii) Intellectual Property Organization of
Pakistan (IPO)
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iv) Earthquake Reconstruction Rehabilitation
Authority (ERRA)

• ERRA Special Allowance
• The proposal of the ERRA Special Allowance was
  agreed to as detailed below-

• Deputation Allowance will be admissible _at_ 20 of
  the basic pay of the rank/post subject to a
  maximum of Rs.6,000/- per month.

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6. BANKS

• Banks in Pakistan, in public or private sector,
  whether commercialized or not, have far higher
  pay scales for their top executives than the
  holders of corresponding management positions
  under the government.
• Table below displaying the NPS 22, 21, 20 and the
  scales of top three executives of various banks
  give the following picture-

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WORLD BANK OBSERVATIONS ON SALARY AND CORRUPTION
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WORLD BANK OBSERVATIONS ON SALARY AND CORRUPTION
Low pay can contribute to corruption within a
public administration particularly when total
remuneration fails to pay a living wage . . .
Public sector salary structures are the real
problem, rather than average levels of public
sector remuneration Changes in compensation
levels can only work if they are part of a
package to reform public servants
behavior (Strengthening Bank Group Engagement
On Governance and Anti-Corruption, 2006)
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THOUGHTS ON COUNTRY ASSISTANCE STRATEGIES
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A NEW APPROACH
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A NEW APPROACH

• The transaction cost sector that consists of
• 1. The Judiciary
• 2. The Police
• 3. The Revenue Administration (all inclusive)
• 4. Public Financial Management
• 5. Accounts and Audit
• 6. General Administration
• Should be established as a Sector within the
  World Bank
• The program should emphasize a balance between
  development and recurrent expenditure during
  negotiations on outcomes/targets with the
  respective institution.
• The negotiations should outline in broad terms
  expectations of the recurrent budget increases
  that result from the negotiations and this should
  be followed by agreed monitoring benchmarks

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SOME THOUGHTS ON COUNTRY ASSISTANCE STRATEGIES

• Governance and anti corruption Framework upgraded
  to global level like PRGF or MDGs provide
  additional support to those countries opting to
  be included in such a program
• The CAS for a particular country would include
  the elements of a general framework for a new
  package for the transaction cost sector
  bureaucracy including structural changes to
  reflect added emphasis on higher functions and
  recurrent budgets
• The framework should have inbuilt incentives to
  rationalize spurious employment as well as limit
  pension overhang.

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Thank You