We should periodically go back to first principles and askWhat is the appropriate remuneration for our politicians (elected representatives). The diagram below, which underpins chapter 5 of BFN, points out the fundamental principal-agent relationships involved.
Leaving aside the need for state funding of elections to ensure that talented good (honest) people can contest elections (a topic that I've discussed at length in BFN), let me focus here only on the principles that should underpin the remuneration of our politicians.
Recognising the principal-agent relationship involved (we the citizens are the principal and politicians our agent) the key objective of the remuneration system should be to align the incentives of the politicians with our interests.
This objective can be achieved if the following simple principles are observed:
1. Pay the politicians very well. This would ensure that highly competent and talented people will find politics a worthwhile endeavour. The second consequence of paying well would be to eliminate the temptation for corruption.
2. Ensure that a good chunk of the salary is performance-based: This is absolutely crucial. Politicians should be:
- REWARDED when the unemployment rate falls, real per capita income increases, prices fall, poverty falls, corruption falls, crime falls, and so on; and
- PUNISHED when unemployment rate increases, real per capita income decreases, prices rise, corruption rises, crime increases, and so on.
This means establishing performance indicators to determine at least half of what our MPs are paid.
3. No rewards should be a matter of right. It is crucial that NO OTHER PERKS AND PENSIONS are awarded – being a mere idler's reward. Perks and pensions create extremely perverse incentives, by tempting people who have well outlived their productive life to hang on for yet another term (pensions often increase the longer you serve as MP – that is a disastrous incentive!).
And why should we give pensions to our politicians? Let them learn to save money as the common man does, and live off that savings in their old age. Plus, they should be competent enough to get a job in the open market once their tenure is over.
It should be obvious upon even the most casual reflection that these principles are necessary if we want our politicians to work for us, and not for themselves alone.
Unfortunately, I haven't come across any country so far that rewards its politicians based on these simple principles. No wonder politicians everywhere tend to loot their nation, rather than serve its interests.
What does this mean for Indian politicians? I would imagine that an average MP in India should be paid up to Rs.50 lakhs per annum in today's rupee value, with about Rs.20 lakhs being a base rate and the other component at risk, with penalties for non-performance that could see the salary drop to as little as Rs.10 lakhs per annum.
Thus, if our MPs do very well FOR US, they could earn up to Rs.50 lakhs. If they do badly FOR US, they'd take home Rs.10 lakhs. They would not get even one rupee worth of perquisites or pensions.
Note that rewards for Ministers would be higher but rewards and penalties tightly aligned to their portfolio.
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