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Singapore News

MAY 20, 2000

Ministers' pay: That million-$ question

It has been six years since the formula to benchmark ministers' pay to that of top private-sector professionals was instituted. As the formula comes under review, CHUA MUI HOONG looks at the controversy surrounding it and asks: Should ministers' pay be revised?

CAMBRIDGE-educated Finian Tan joined the elite Administrative Service three years ago in a blaze of expectations. This month, The Business Times reported that he will leave soon for a venture capital firm -- a report he did not deny.

Yesterday, The Straits Times ran a report on two young men who left the Administrative Service to start an Internet-based business.

The same day, a reader rang to say he wanted to get in touch with the duo, because, well, they were his ex-colleagues, and because, well, he too was a former Administrative Service officer who was now in a dot.com.

Pity the Public Service Division, the personnel arm of the Civil Service.

Problem 1:

What do you do when bright young talent give up pay packages pegged to the top 15th-earning professional, for the uncertain fortunes of the dot.coms, where the chances of success are about one or two in 100?

Fast playback, to 1994.

Prime Minister Goh Chok Tong, in a Parliamentary debate on ministerial pay, argued that a new formula to peg ministers' pay to top private sector earners was fair, and that the pay "will go up when the economy does well, and come down when it does not".

But last month, Deputy Prime Minister Lee Hsien Loong said that the income gap had widened during the recession of 1997 and 1998. Workers' wages fell across the board.

"At the top, we expected incomes also to fall, after a delay. But this did not happen. To our surprise, the Civil Service salary benchmarks rose steadily throughout the crisis."

Problem 2, for the politicians: How to justify a salary benchmark that runs counter to economic growth?

And how to refine it so it is attractive enough to recruit and retain talent amid the feverish wage packets of the new economy, but flexible enough to reflect performance? FOR the Government, one part of the solution to stem the brain drain lies in reviewing its personnel policies, including its pay structure.

Both Mr Goh and Brigadier-General (NS) Lee have said that Civil Service salaries need to be revised upwards.

But critics will say that the brain drain, despite the generous pay packages, shows that money is not the answer. Other factors, such as work culture and job satisfaction, matter more.

This is, in a way, an old issue.

Much of the same sentiments were voiced in 1994, when the Government introduced a formula to peg the pay of ministers and top civil servants to the private sector.

It did so by setting two benchmarks.

First, the pay at Staff Grade 1, for ministers and senior civil servants, is pegged at two-thirds the average income of the top four earners in six areas: banking, accountancy, law, engineering, local manufacturing and multi-national corporations.

Staff Grade 1 officers now get about $861,000 a year.

The other benchmark, Superscale G, is pegged to the top 15th earner, aged 32, in those same six areas. Those officers now get about $242,000 a year.

The formula drew much flak then. Some argued that it demeaned public service to put a price tag to the privilege of serving the nation. Many found it distasteful for elected representatives to discuss their own salaries and vote on them in Parliament.

Today, the dust has settled somewhat, but judging from the stream of "no comments" encountered by Insight on this issue, the public has not been won over completely.

Responses along the lines of "They earn so much already, how much more do they want?" and "I earn $1,500, why should they get so much more?" are still common whenever ministerial pay is discussed.

Nominated MP Zulkifli Baharudin adds: "The trouble is that Singapore is a very small country. And you may know the guy five years ago, he was sitting next to you at work, now he's a minister, earning 10 times more than you!

"That personal factor can't be removed, but you shouldn't value someone that way. Instead, you should value someone on the basis of what his work is worth to the corporation."

And several of those interviewed say ministers should not raise their own salaries when workers are still making do with lower employer contributions to the Central Provident Fund.

They ask: Why raise Civil Service and ministerial pay now, and restore the CPF cut only three years later?

It is difficult to explain to workers whose median income is $1,700 a month, or $22,000 a year, just why ministers who already receive almost $1 million a year, should be paid more.

Income issues are emotional and deeply personal, because they relate to individuals' sense of self-worth.

While such feelings must be taken into account, the more pertinent question to ask is: Are ministers worth the money?

Yes, says lawyer and Sembawang GRC MP K. Shanmugam, who points out that $1-million-a-year salaries are mind-boggling to many, but top professionals make that kind of money routinely every year.

"I deal with lawyers, bankers, top earners. I interact with them and I interact with the ministers, and I see no reason why the ministers should be paid any less on the basis of their calibre and the nature of their work."

Others say it depends on the minister's performance.

Mr Zulkifli adds: "Having gone so far to pursue an attractive entrance strategy, you must have an equally aggressive exit strategy, so that incompetent ministers are removed. At the moment, the problem lies in attracting people. Later, the deadwood problem may arise."

But unless the Prime Minister releases his performance appraisal of every Cabinet member, the question of whether individual ministers earn their keep can never be answered to voters' satisfaction.

It might be more practical to ask: How much value has the Cabinet as a whole created?

One way to address this is to look at the ministers' wage bill as a percentage of gross domestic product (GDP).

A back-of-the-envelope calculation shows that the total wage bill for ministers has remained constant, at about 0.014 per cent of GDP, between 1959, when the People's Action Party came into power, and 1999. (See graphic)

A wage bill of $20 million, maybe $25 million, for a group that steers an economy worth $140 billion, surely appears like a fair one. At least, for now.

THE problem with the formula so far is that everything risks being thrown into disarray by changes in the last two or three years.

As BG Lee noted, the formula proved recession-proof and went up when wages across the board fell. He is expected to make an announcement on Civil Service salaries next month.

Just why the salaries went up when the country fell into recession is no doubt a question that occupies those million-dollar, public-sector minds right now.

One reason BG Lee alluded to: Top earners' pay is pegged more to global factors and so does not follow domestic business cycles.

This was not widely expected six years ago.

As lawyer and Bishan-Toa Payoh GRC MP Davinder Singh points out, law firms are finding it hard to attract bright young lawyers nowadays, as more of them are moving to work in London or New York.

"It's no longer a case of the public and private sectors competing for talent, now it's a case of the private sector in Singapore competing with law firms overseas."

Management consultancy McKinsey & Company says in a paper on its website, www.mckinsey.com, that there is an intense war for talent going on.

Quoting an article in a business magazine, it says: "Today's high performers are like frogs in a wheelbarrow: they can jump out anytime."

One result of the scramble for talent: CEO pay in the United States has quadrupled in the last six years.

From US$2.8 million (S$4.8 million) a year in 1994, the average CEO of a large corporation earned US$12.4 million last year.

To be sure, the US is not Singapore, and pay packages at volatile Fortune 500 companies, where some CEOs last no more than two quarters, should not be used as the benchmark for the more staid jobs of government ministers.

But both are open, market-driven economies. Fund managers often say Singapore is about 12 to 18 months behind the US, and that a look at trends today in that country suggest what could be on the horizon for the Republic.

Consider also that last year, the average CEO in Singapore earned 44 times what the worker took home. The Prime Minister earned about 41 times what the worker took home.

In the US, CEOs earned 42 times what workers did, in 1980. By 1990, it was 84 times. Then, last year, it was an incredible 475 times, says Business Week data on its Executive PayWatch website.

The point: Growth in top executives' pay has been exponential in the last five to six years.

The same trend will show up in Singapore -- and public sector pay has to be adjusted to take the market realities into account.

One option mooted is to offer ministers and top civil servants stock options, on the rationale that these give government members a chance to benefit from a booming economy they helped create.

Some oppose it. Says one manager: "If you want stock options, join a company that offers it."

PM Goh said recently the stock option route was considered but turned down, because of the potential for a conflict of interest.

In fact, conflict-of-interest issues can be avoided by setting up a "blind" trust fund.

This was what McKinsey did. It set up an investment office tapping firm-members' funds and pension funds, to invest in venture-capital funds and hedge funds.

This investment office is run independently of the consulting service, and holds money in a "blind" trust, so that partners do not know if McKinsey holds shares in the companies they are advising.

Shares in a fund of, say, government-linked company stocks can form part of the remuneration for top civil servants and even ministers.

Mr Davinder Singh suggests an alternative: adding a sizeable variable component to the pay formula, based on income-tax figures for the previous year.

Income-tax returns are filed by April, and preliminary data should be available in June to determine a bonus amount. Now, benchmark salaries are based on income data of two years ago. A MINISTERIAL pay salary pegged to runaway pay for top executives that defies economic-growth trends is guaranteed to become a definite political liability.

Whatever change is decided on has to satisfy two conflicting pulls.

On the one hand, the Government wants a fighting chance in the war for talent and so needs a multi-million-dollar war chest to woo that talent. On the other, setting up that war chest risks alienating the rank-and-file.

How to tread that balance? Well, that is one of the things those million-dollar-a-year brains must grapple with. -- Additional reporting by Laurel Teo