Institutions related to compensation

In India, instructional set up for regulating compensation system is twofold viz. wage board for regulating compensation in industries belonging to private sector including  newspaper establishments and working k=journalists while pay commission tend to regulate the compensation of public servants.

  • Wage Boards: In the 1950s, when the organized labour sector was at a nascent of its development without adequate unionization or with trade unions without adequate bargaining power, government in appreciation of the problems which arise in the arena of wage fixation due to absence of such bargaining power, constituted various wage boards. The first wage board was set up 1957 by the government for cotton textile industries and 30m wage boards have been sp far set by the government. Since then a large number of industries have been brought under the scope of wage boards, wage boards seek to
    • Improve conditions for better industrial relations in the country.
    • Standardize wage structure uniformly across a given industry.
    • Pave the way for settlements inconsonant of social and economic policies of the government.


  • ­­­­Pay Commission: Pay commission is an administrative system that the government­­­nt of India set up in 1956 to determine the salaries of government employees. Compensation level structure and system is based upon the recommendations of pay commission being set up by the central government although some of the state governments set up their own pay commissions. Government of India has set up so far pay commissions. The first pay commission reported in 1947, second in 1959, third in 1973, fourth in 1984, fifth in 1996 and sixth in 2008. Pay commission also cover compensation of employees working in public sectors such as nationalized banks industrial establishment.

The pay commission set up from time to time seeks to study current compensation of the employees and collects from the market through external surveys. Generally these surveys use questionnaire method and an expert Is appointed to collect and process the data and submit report to the pay commission. For example, Institute of Management was entrusted with certain survey responsibilities by the sixth pay commission. The pay commission also initiates intense discussions and dialogues with all concerned, that is employees representatives, trade unions, and public with concerned that is employers, employee’s representatives, trade unions, and public with purpose of getting a wider and deeper insight into the issues. While conducting external surveys, costs of living is also considered based on consumer price index and to provide for appropriate neutralized for meeting the rise in cost of living. Upon preparation of recommendations it is presented to the government which can accept the recommendations fully or partially or may even reject the recommendation of pay commissions. Once the recommendation of the pay commission is accepted by the government it is implemented.

We shall briefly describe the purpose and recommendations of the six pay commission as follows:

  • First Pay Commission: The first pay commission was established in the early stages of independent India and felt that commission of government employees cannot be set solely on the classical economics reasoning of demand and supply. India being a welfare state and government being responsible for faithful implementation of constructional provisions, it was felt, in the interest of fairness, justice and adequacy, that the government employees should be paid a living wages to ensure minimum standard of quality of life. The idea was based on government acting as a ‘model employer’. However the Fair wages Committee, 1948 also submitted its report on wage policy to be adopted and their report differentiated between living wage, fair wage and minimum wage. Thus it is clear that pay commission living wage was actually a minimum wage.
  • Second Pay Commission: The second pay commission took the concept of living wage (model employer premise) further as matter of social policy. It argued that living wage is essential for attracting competent employees and maintaining efficiency. Minimum wages should be considered in view of economic concerns only but to satisfy the principles of social justice also. It reached the conclusion that government should compensate above minimum wages and provide fair wages to the public servants.
  • Third Pay Commission: The third pay commission gave the criteria of a pay system as follows:
    • Inclusiveness: The pay structure adopted for the civil service should be broadly implemented by autonomous, quasi-government organizations also. The large scale appointment of temporary employees should be discouraged and brought down to minimum.
    • Comprehensibility: The pay structure should provide compensation to all employees and at all levels in a comprehensive manner. Equal payment should be made for equal work.
    • Adequacy: The pay level and structure should be internally and externally equitable so that government employees are not put in any disadvantages positions with respect to other employees.


  • Fourth Pay Commission: The fourth pay commission focused on the criteria for fixing pay levels and structures for government employees. it conclude that market comparison cannot be relied upon for determining pay system for employees in public service as compared to employees working in private sector. This is because the motto of public sector is service whereas that of private sector business in profit. Also, while observing ability to pay, it concluded that it is feasible for private sector organization and it is extremely difficult to assess the government’s ability to pay. Therefor it is recommended that government should pay “fair wages” to the public servants. The fairness concept is based on two premises viz. fairness to the employees as well as to people they serve.

Further , pay commission concurred that dearness allowance should be treated as part and parcel of compensation structure of employees and recommended that full neutralization od rise in cost of living should be paid @ 80% to employees drawing basic pay up to Rs. 3,500 per month, 75% to employees drawing basic pay between Rs. 3500 and Rs. 6000 per month and 65% to for employees with basic pay above Rs. 6000 per month. 


  • Fifth Pay Commission: The pay commission recommended for pay revision based on work organization and power planning. Itr also recommended that 40% increase in pay with 30% reduction in manpower over a three year period. It emphasized new means of recruitment including contract employment and brining about innovation in training, performance appraisal, career progression, transfer policies and grater accountant of government employees.


  • Sixth Pay Commission:

The terms of reference of sixth pay commission are as follows:

  1. To examine the principles, the data of effect thereof that should given the structure of pay, allowance and other facilities whether in cash or in kind to the following categories of employees.
  2. Central government employees industrial and non-industrial.
  3. Personnel belonging to the All India Services.
  4. Personnel belonging to the Armed Forces.
  5. Personnel to the union territories.
  6. Officers and employees of the India Audit and Accounts Department.
  7. Member of the regulatory bodies set up under Acts of Parliament.

HR-Professionals 12 Compensation 12


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