Published in Vol. 51 No.3 of Indian Journal of Training & Development

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IJTD - Volume 51, No. 3 July-September, 2021
Performance Related Pay: A Tool for Rewarding Excellence in
Central Public Sector Enterprises in India
Nishdeep Singh*
Amit Madan**
INTRODUCTION
Central public sector enterprises (CPSEs) in India
since inception have been playing a pivotal role
in realising the objective of achieving higher
growth and equitable development. They have
supplemented the growth of the country with their
prowess, performance and resilience reflected even
in the most challenging times and have emerged
ABSTRACT
The concept of performance related pay (PRP) was introduced in Central Public Sector Enterprises
(CPSEs) in India by Department of Public Enterprises (DPE) based on the recommendations of Second
Pay Revision Committee, as an integral component of the pay structure effective from 01.01.2007.
The scheme comprises monetary payment over and above the salary, based on the performance of the
individual employee and the CPSE, on the principle of differential award for differential performance.
The admissibility, quantum and procedure for the computation of PRP in CPSEs was later amended by
DPE, based on the recommendations of Third Pay Revision Committee as a component of revised pay
structure effective from 01.01.2017. The committee reconsidered the model of PRP based on the feedback
received from CPSEs, incorporated team performance parameter and made other modifications in the
PRP computation methodology to enable CPSEs to better direct employee’s efforts towards achieving
organisational objectives.
The shift towards pay for performance culture has enabled CPSEs to not only dominate strategic sectors
in the domestic market but also augment their global competitiveness.
KEYWORDS
Performance Linked Incentive (PLI), Variable Pay, Remuneration, Compensation, Performance Appraisal,
Central Public Sector Enterprises (CPSE), Department of Public Enterprise (DPE).
stronger and more competitive. Over the years,
Indian CPSEs have been recognised as having a
unique place among the state-owned enterprises of
the world and a number of around 250 operating
Indian CPSEs are amongst the leading organisations
with presence in India and abroad.
CPSEs have also played a vital role in supporting the
socio-economic development of the country. As the
* Executive Director (HR), Power System Operation Corporation Ltd.
Email id: nishdeepsingh@posoco.in
** Manager (HR), Power System Operation Corporation Ltd.
Email id: amitmadan@posoco.in
Case Study

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world grapples with an unprecedented pandemic
which has adversely impacted the countries across
the spectrum, the role and efforts of Indian CPSEs
towards the revival of the economy have been an
integral part of the nation’s recuperation and revival.
With the changing dynamics and increase in
competition, more focus is being assigned in
CPSEs towards redefining people practices, as per
the demands of the business, with meticulously
articulated HR strategies. The emphasis is on
recognising and rewarding meritocracy at all
levels through a structured approach of payment
performance related pay (PRP) or variable pay,
intertwined with the annual appraisal process in
the organisation.
Concept and Significance of Variable Pay or
Performance Related Pay (PRP)
Performance related pay or variable pay is a system
of remuneration that provides the employees with
financial rewards in the form of increases in pay, linked
to assessment of performance usually in relation to
agreed objectives. Such remuneration schemes are
based on the principle that an individual’s pay should
vary based on the performance of the individual,
group and the organisation, in order to encourage the
efforts to a higher level. Proponents of variable pay
claim that such schemes raise the levels of employee
motivation and create a culture in which employees
genuinely care about organisational effectiveness.
Several organisations are using variable pay as a
strategic tool not only to retain but also for taking
the best out of their employees.
To be effective PRP or variable pay schemes should
be appropriate to the organisational culture and
must be implemented with the support of the top
management. Such schemes need to be linked
to a sound system of performance management
with a robust mechanism for target setting, its
review and assessment. Such schemes need to be
sufficiently flexible to take into account the changes
in circumstances. The link between the financial
rewards and performance must be clear and should
be properly communicated. Also, the quantum of
the PRP or variable pay should be appropriate in
terms of the efforts put in and the results produced.
Performance Related Incentives in the
Government – Historical Background
Performance related incentive scheme was first
recommended in Central Government in the year
1987 when the Fourth Pay Commission suggested
variable increments as a means to reward better
performance by government employees. The Fifth
Pay Commission report submitted to the government
recommended another variable pay strategy –
extra increments for the exceptionally meritorious
performers with denial of regular increments for
under-performers.
In 2008, the Sixth Pay Commission suggested a
performance related incentive scheme (PRIS) in
Central Government that offers a monetary perk
over and above the salary for higher performance.
The Commission proposed payment of PRIS taking
into account the performance of the employee, on
the principle of differential award for differential
performance. It was recommended that additional
finances for implementing PRIS should be generated
internally through cost and efficiency improvements
and productivity increases. The recommendations
of the Commission were accepted and the scheme
has since been operational in Department of Atomic
Energy and Space for scientists.
For formulating the concept, principles and
parameters for PRIS, the Commission engaged
Indian Institute of Management (IIM), Ahmedabad.
The synthesis report of the studies has observed:
“In India, Government employees are paid according
to their service incremental salary scales. For a
larger (majority) section of the employees there is
hardly any performance linked incentive available
to them. Their salaries are only a composite of
basic pay plus certain allowances including DA that
are admissible depending on the nature of jobs
and duties and accompanying working conditions.
In fact, natural increases in salary are very much
guaranteed to Government employees. This leads to
a situation where employees do not exert themselves
for a higher level of on-the-job performance and
achievements, thus depriving the Government of
potential productivity gains and service delivery
enhancements, both in terms of quantum and

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quality. There is no external motivation for risk-
taking and delivering a higher level of performance,
because though the risk-taking is punished if
things go wrong, it is not financially rewarded if
things improve because of employee’s initiative
and risk-taking. Over the years, this has led to the
development of a culture where the employees have
become risk-averse.”
The Commission in its report opined that lower risk-
taking ability of public servants, where emphasis is
only on routine observation of procedures without
any reference to end results or outcome, can be
changed only through changes in the work culture
that rewards performance.
Implementation of Performance Related Pay
(PRP) in CPSEs
With focus on enhancing productivity and economic
growth of the country, performance related
payments have always been present in CPSEs, in
one form or the other. Initially, ex-gratia payments
were being made by CPSEs to the employees, based
on diverse parameters related to work-efficiency
and productivity. Later CPSEs introduced incentive
payments, in addition to the ex-gratia, based on
certain internal performance parameters such as
product output, sales volume growth, cost control
etc.
However, it was First Pay Revision Committee,
formed for recommending pay structure effective in
CPSEs w.e.f. 01.01.1997, which proposed a uniform
structure of compensation and performance
incentives in CPSEs. The broad outline of performance
related payments in the form of Performance Linked
Incentive (PLI) was first proposed by the committee
and implemented in CPSEs wherein PLI not exceeding
5% of the distributable profits was normally paid to
the employees. The PLI payment was linked to the
overall performance of the CPSE and was disbursed
at a uniform percentage of the salary, but similar to
the previous schemes, did not encompass linkage of
the incentive payment, to the level and individual
performance of the concerned employee in the
Annual Performance Appraisal.
Second Pay Revision Committee (formed for
recommending pay structure effective in CPSEs
w.e.f. 01.01.2007), for the first time proposed
implementation of variable pay payment in CPSEs
in the form of performance related pay (PRP), on
the principle of differential award for differential
performance. Based on the recommendations of
the committee, Department of Public Enterprise
(DPE) introduced the concept of PRP in CPSEs
in India, vide its Office Memorandum dated
26.11.2008. The scheme of PRP recommended by
the committee incorporated the level as well as
individual performance of the employee, as essential
parameters for variable pay payment, in addition to
the overall performance of the CPSE. The committee
recommended that performance related pay (PRP)
be made an integral part of the compensation
package and should progressively become major
component of the Executive compensation.
PRP Computation Methodology Recommended by
the Second Pay Revision Committee
Based on the recommendations of Second Pay
Revision Committee, DPE prescribed for PRP
payment to be based on financial performance of
the CPSE and shall come out of the profits in the
following manner:
(i) 60% of the PRP to be paid from Profit Before
Tax (PBT) of the year subject to a ceiling of 3%
of PBT.
(ii) 40% of PRP to be paid from 10% of incremental
PBT.
(iii) The total PRP payout was prescribed to be
limited to 5% of the year’s PBT.
DPE further prescribed for linkage of PRP payment
with the (a) Level of the Executive, (b) CPSE
Performance (MoU rating of the CPSE), and
(c) Individual Performance as follows:
Level of Executive: DPE prescribed the PRP
entitlements for different levels of Executives,
expressed as a percentage of basic pay. The
grade-wise percentage ceiling for drawl of PRP,
progressively increasing from junior level to senior
level Executives is indicated in Table 1:

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Table 1: Grade Ceiling of PRP in CPSEs
Grade of Executive Percentage of Basic Pay
E0 to E3 40%
E4 to E5 50%
E6 to E7 60%
E8 to E9 70%
Director (c&d) 100%
Director (a&b) 150%
CMD (c&d) 150%
CMD (a&b) 200%
Note: For Non-unionised Supervisors, PRP as a percentage
of Basic Pay is prescribed to be decided by respective
Board of Directors of CPSE
CPSE Performance (MoU Rating of CPSE): DPE
prescribed that each CPSE would be required to sign
the Memorandum of Understanding (MoU) with its
parent Ministry. The percentage eligibility for PRP
was prescribed to regulated based on MoU rating of
the CPSE in the relevant year as indicated in Table 2:
Table 2: Grade Ceiling of PRP in CPSE Performance
CPSE MoU Rating Percentage Eligibility of PRP
Excellent 100%
Very Good 80%
Good 60%
Fair 40%
Poor Nil
Individual Performance: Similar to CPSE
performance, DPE prescribed for linkage of PRP
payment with the individual performance of each
executive. To measure individual performance, DPE
instructed CPSEs to develop a robust and transparent
performance management system. CPSEs were
prescribed to adopt ‘Bell Curve Approach’ in grading
the executives so that not more than 10 per cent to
15 per cent of the Executives are rated as ‘Excellent’
and 10 per cent of the Executives should be rated
‘Below Par’.
PRP Computation: DPE prescribed for PRP
computation to be based on multiplication interse
each of the above components i.e., PRP payout
= Grade PRP Ceiling × Percentage Eligibility of
PRP (CPSE Rating) × Percentage Eligibility of PRP
(Individual Rating).
An illustration depicting PRP computation based
on the recommendations of Second Pay Revision
Committee is given in Table 3:
Table 3: Illustration – PRP Computation as per
the Recommendations of Second Pay Revision
Committee
PBT of Current FY 2011-12 ` 5000 Crores
PBT of Previous FY 2010-11 ` 4500 Crores
Incremental PBT ` 500 Crores
Total PRP payout requirement in the
CPSE for FY 2011-12
` 100 Crores
Meeting the Financial Parameters 60% of PRP payout (` 60 Crores)
is within 3% of current year’s PBT
(` 150 Crores)
40% of PRP payout (` 40 Crores)
is within 10% of increment PBT (` 50
Crores)
Total PRP Payout (` 100 Crores) is
within 5% of year’s PBT (` 250 Crores)
Level of Executive E5 Grade (Grade PRP Ceiling: 50 % of
Basic Pay)
CPSE Performance
(MoU Rating of the CPSE)
Very Good
Individual Performance
(Executive Rating in Annual
Performance Appraisal)
Excellent – Top 10% performers
among Executives
PRP payout distribution =
50% (Grade PRP Ceiling) × 0.8 (‘Very
Good’ CPSE MoU Rating) × 1.00
(‘Excellent’ Individual Rating)
50% × 0.8 × 1.00 = 40% of Basic Pay
Modification in PRP Computation Methodology—
Recommendations of Third Pay Revision
Committee
Third Pay Revision Committee (formed for
recommending pay structure effective in CPSEs
w.e.f. 01.01.2017) revisited the model of PRP, and
to equip the CPSEs to compete in the domestic and
global economic scenario, recommended modified
model of PRP for implementation in CPSEs. Based
on its recommendations, DPE vide its Office
Memorandum dated 03.08.2017 issued revised
instructions in respect of admissibility, quantum
and procedure for computation of PRP. The revised
scheme encompasses the following components:
Allocable Profits: DPE prescribed that the overall
profits for the distribution of PRP shall be limited to
5% of the year’s profit accruing from core business
activities. It is prescribed that the ratio of breakup of
profits accruing from the core business operations
for payment of PRP, between relevant year’s profits
to incremental profit shall be 65:35, to arrive at the

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Allocable profits and the Kitty Factor. The concept
of Kitty Factor is explained later.
DPE prescribed for linkage of PRP payment with
(a) Level of the Executive, (b) CPSE Performance
(MoU rating of the CPSE), (c) Team Performance,
(d) Individual Performance, and (e) Kitty Factor, as
follows:
Level of Executive: DPE rationalised the gradewise
percentage ceilings for drawl of PRP as indicated in
Table 4:
Table 4: Grade Ceiling of PRP in CPSEs
Grade of Executive Percentage of Basic Pay
E0 to E3 40%
E4 to E5 50%
E6 60%
E7 70%
E8 80%
E9 90%
Director (c&d) 100%
Director (a&b) 125%
CMD (c&d) 125%
CMD (a&b) 150%
Note: For Non-unionised Supervisors, PRP as a percentage
of Basic Pay is prescribed to be decided by respective
Board of Directors of CPSE.
DPE further prescribed for computation of PRP based
on 50 per cent weightage to CPSE performance, 30
per cent weightage to Team Performance and 20
per cent weightage to Individual Performance as
follows:
CPSE Performance (MoU Rating of CPSE): The
percentage eligibility for PRP, applicable in case
of different CPSE MoU ratings, is rationalised as
indicated in Table 5:
Table 5: CPSE Performance (Weightage: 50%)
CPSE MOU Rating Percentage Eligibility of PRP
Excellent 100%
Very Good 75%
Good 50%
Fair 25%
Poor Nil
Team Performance: The performance of employees
in teams being a key driver for CPSE performance,
Team performance is prescribed as a parameter for
the computation of PRP. The percentage eligibility
for PRP payment prescribed by DPE, applicable in
respect of different Team ratings, is indicated in
Table 6:
Table 6: Team Performance (Weightage: 30%)
Percentage Eligibility of PRP
Excellent 100%
Very Good 80%
Good 60%
Fair 40%
Poor Nil
DPE further provided guidelines for evaluating Team
Performance, which are summarised in Table 7:
Table 7: DPE Guidelines for Evaluating Team
Performance
Team’s rating is prescribed to be linked to individual plant/unit’s productivity
measure and physical performance, as primarily derived from CPSEs’ MoU
parameters and as identified by CPSE depending on the nature of business
under the following suggested performance areas:
Achievement Areas in which the performance has to be maximised (e.g., sales
volume growth, product output, innovations in design or operation, etc.), and
Control Areas in which control has to be maximised (e.g., operating cost
control, litigation cost, safety, etc.).
For office locations of CPSEs, team rating is prescribed to be linked to the
plant/unit as attached to the said office, and if there is more than one
plant/unit attached to an office or in the case of Corporate Office, the team
rating is prescribed to be weighted average of all such plants/units. The
weighted average is to be based on the employee manpower strength of
the respective plants/units.
Individual Performance: The percentage eligibility
for PRP payment prescribed by DPE, applicable in
respect of different Individual performance ratings,
is indicated in the Table 8:
Table 8: Individual Performance (Weightage: 20%)
Individual Performance Rating Percentage Eligibility of PRP
Excellent 100%
Very Good 80%
Good 60%
Fair 40%
Poor Nil
Bell Curve is prescribed to be discontinued and
CPSEs are empowered to decide on the ratings to
be given to Individual executives. The mandatory
forced rating of 10% as ‘Poor’ performer is removed.
However, capping of giving ‘Excellent’ rating to not
more than 15% of the total Executives in the grade
is prescribed to be adhered to.
Team Performance Rating

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Kitty Factor: Computation of Kitty Factor is prescribed
for arriving at the PRP payout. After considering the
relevant year’s profit, incremental profit and the full
PRP payout requirement, computation of two cut-off
factors is prescribed to be worked out based on the
PRP distribution of 65:35. The first cut-off in respect
of PRP amount required out of year’s profit, and the
second cut-off in respect of PRP amount required
out of incremental profit, computable based on the
break-up of allocable profit (i.e., year’s 5% of profit
bifurcated into the ratio of 65:35 towards year’s
profit and incremental profit). DPE prescribed Kitty
Factor as a sum of first cut-off factor applied on 65%
of Grade PRP ceiling and the second cut-off factor
applied on 35% of Grade PRP ceiling. DPE further
prescribed that Kitty factor shall not exceed 100%.
PRP Computation: Based on the PRP components
specified above, DPE prescribed computation of
PRP pay-out to the Executives upon addition of the
following three elements:
(a) Factor-X (% of BP): Weightage of 50% multiplied
with Part-1 (CPSE’s MoU rating) multiplied with
Kitty factor
(b) Factor-Y (% of BP): Weightage of 30% multiplied
with Part-2 (Team’s performance) multiplied
with Kitty factor
(c) Factor-Z (% of BP): Weightage of 20% multiplied
with Part-3 (Individual’s performance) multiplied
with Kitty factor.
PRP = Factor X + Factor Y + Factor Z = Percentage
of Annual BP
An illustration depicting PRP computation based
on the recommendations of Third Pay Revision
Committee is given in the Table 9:
Table 9: Illustration – PRP Computation as per
the Recommendations of Third Pay Revision
Committee
Profit from Core Business Operations
of Current FY 2019-20
` 5000 Crores
Profit from Core Business Operations
of Previous FY 2018-19
` 4500 Crores
Incremental Profits ` 500 Crores
Total PRP payout requirement in
CPSE for the FY 2019-20
` 100 Crores
Cut-off Factor 1
(65% of 5% of Current Year’s
Profits / 65% of Total PRP Payout
Requirement) × 100
162.5 Crores / ₹ 65 Crores × 100 =
250% (to be restricted to 100%)
Cut-off Factor 2
(35% of 5% of Current Year’s
Profits / 35% of Total PRP Payout
Requirement) × 100
87.5 Crores / ₹ 35 Crores × 100 =
250% (to be restricted to 100%)
Level of the Executive E5 Grade (Grade PRP Ceiling: 50% of
Basic Pay)
Kitty Factor =
[65% × Grade PRP Ceiling (%) × Cut
Off Factor (1)] + {35% × Grade PRP
Ceiling (%) × Cut-Off Factor (2)]
Kitty Factor =
65% × 50% × 100% + 35% × 50% ×
100% = 50% (The computed Kitty
Factor is within 100%)
CPSE Performance
(MoU Rating of the CPSE)
Very Good
Team Performance Excellent
Individual Performance
(Executive Rating in Annual
Performance Appraisal)
Excellent – Top 10% performers
among Executives
PRP payout = (Factor X + Factor Y +
Factor Z)% of Basic Pay
Factor X = 50% × MoU Rating% × KF%
Factor Y = 30% × Team Rating% × KF%
Factor Z = 20% × Individual Rating%
× KF%
PRP payout =
Factor × = 50% × 0.75 (CPSE Rating)
× 0.5
Factor Y = 30% × 1.00 (Team Rating)
× 0.5
Factor Z = 20% × 1.00 (Individual
Rating) × 0.5
(18.75% + 15% + 10%) of Basic Pay =
43.75% of Basic Pay
Analysis of Key Modifications in PRP Computation
Methodology
A comparative analysis has been undertaken of
the PRP computation methodology prescribed by
DPE based on the recommendations of Second
Pay Revision Committee and Third Pay Revision
Committee. It has been observed that DPE made
some crucial modifications in the PRP computation
methodology, based on the recommendations of
Third Pay Revision Committee which are discussed
as under:
Rationalisation of Grade PRP Ceilings: Grade
PRP ceilings are rationalised, especially for senior
Executives, considering that on revision of basic
pay w.e.f. 01.01.2017, the maximum payable PRP
get revised automatically due to its linkage with the
percentage of basic pay.
Addition of Team Performance parameter: The
Committeeobservedthatteamperformanceiscrucial
to drive superior performance in the CPSEs and is the
prime link between individual performance and the

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CPSE performance. Incorporating Team Performance
in the computation of PRP would promote building
team spirit among the employees. Thus, based
on the recommendations of the committee, Team
Performance is added as a key parameter for PRP
computation, to inculcate team culture in CPSEs and
to motivate the employees to excel as a team.
Discontinuance of ‘Bell Curve Approach’: ‘Bell
Curve Approach’ is discontinued in the grading
of executives as the method was found to be
repressive and demotivating apart from having
an adverse impact on team spirit. The Committee
noted that several private sector organisations are
also doing away with Bell Curve concept, for the
reason that its experience has not been satisfactory.
Rather than raising the bar for performance inside
Organisations, this method creates a dysfunctional,
hyper-competitive work environment.
Profits accruing from Core Business Operations: In
order to remove all extraneous factors impacting
the profits of the company, only those profits of the
CPSE which accrue from Core Business Operations
are prescribed to be considered, for the purpose of
PRP computation.
Computation of PRP: The Committee noted that
multiplier effect in the earlier method for the
computation of PRP, particularly between the MOU
rating and the individual performance, leads to
cascading effect for the Executive, thereby reducing
the percentage of PRP due to the multiplier effect
of both the components. Accordingly, weightage of
50 per cent, 30 per cent and 20 per cent is assigned
to Company, Team and Individual performance
respectively, and PRP is prescribed to be computed
by multiplying the sum of all these factors with
the Kitty Factor. Also, the concept of Kitty factor
under the new scheme, which essentially takes into
account the amount available for PRP payment and
the total PRP payout requirement, predominantly
modified the computation of PRP.
CONCLUSION
Performance Related Pay (PRP) or variable pay is
now considered as a significant tool for rewarding
excellence in CPSEs in India. The reason why there
has been more focus towards variable pay in CPSEs
lately, is that it helps stimulate the workforce to
the highest level of potential productivity. When
employees know that their compensation is tied
directly to performance, they are more likely to
exert greater efforts, and focus more on achieving
business outcomes.
Introducing variable pay component in the total
compensation package has proved to be a major
moraleboosterforencouragingsuperiorperformance
in CPSEs. The concept has been improved over time,
to better direct the employee’s efforts towards
achieving organisational objectives. The pay for
performance culture has enabled CPSEs to make
their dominant presence felt in the corporate sector.
While achieving excellence in the strategic areas in
the domestic markets, CPSEs have moved beyond
boundaries by foraying into global markets and are
now representing India globally.
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