Reviewing ministerial salaries: Seven lessons from the private sectorI agree with Mak. Not only that, I think that it is also an affront to the many who make an honest living on high pay to suggest that paying them less would encourage corruption. I mean, just take a look at this nice, honest-looking man over here:
04:46 AM May 26, 2011
by Mak Yuen Teen
Last week, I taught executive and director pay to an executive MBA class and, during lunch, the subject of conversation at my table was ministerial pay in Singapore - a regular topic among the executives attending the programme over the years.
While most of the rest of the world is concerned with high executive pay, this must be the only country where ministerial salaries are of more interest.
Quite coincidentally, on Saturday morning, I had begun writing a commentary with the tentative title of "Ministerial pay: Lessons from corporate scandals and the financial crisis". That night, I saw on the news the Prime Minister's announcement that he was setting up a committee to review ministerial pay.
When you pay poorly, you might still get good people but, undoubtedly, the pool you select from will be smaller. You may also attract some who are willing to take low pay because they want to use their position for other benefit, such as taking bribes or getting directorships in companies.
When you pay very well, the pool will be larger, but you also risk attracting the wrong people who are motivated purely by money. People who are attracted to politics because of the money (or power) might still want to use their positions for their own benefit because for some, it is never enough.
I personally do not believe that high pay is effective for fighting corruption; I think it is an affront to the many who make an honest living on low pay to suggest that paying little encourages corruption.
This man earns a lot of money (about 3 or 4 million dollars per year, excluding bonuses). He is also a well-respected man, who has held public office for many years. And in all those many years, there has never been any reason to believe that he has ever done anything corrupt.
But you know what his father says, and has said for many years, right? According to Daddy, if his son's salary was cut (for example, to only 1 or 2 million dollars per year), then he would feel tempted to become dishonest, and to cheat, and take bribes.
Now, if I were the son, I would feel very insulted by such remarks. For if I were a genuinely honest man, I would never think of taking bribes and Daddy's remarks are therefore indeed an insult to me. And the only temptation I would feel is the temptation to slap my father's face.
But that wouldn't be very nice. At least, I wouldn't do it in public - it would be politically incorrect. Daddy, after all, is a pretty powerful man. In practical terms, perhaps my only feasible course of action would be to wait, wait and wait ... until Daddy grows very old, and retires. Then I could go about taking steps to change his long-standing policy on ministers' salaries.
However, it is very difficult to determine what is the "right" pay for CEOs, people with very specialised skills - and government ministers. For CEOs, certain "benchmarks" have been suggested, such as some percentage of profits, some ratio to average employee pay, the pay of sports stars and celebrities or fellow CEOs. None of these are wholly satisfactory."Projects with high economic payoffs, but with attendant high social costs" ...? Hmmm, that sounds like two things to me.
Benchmarking ministerial pay to other professions has its limitations because they are totally different jobs, and different jobs come with different lifestyles and employment risks. When I look at my peers who have gone to the private sector, many are earning a lot more than I do now, but they do not have my more flexible lifestyle as an academic, and they are not able to achieve tenure which gives better job security.
In any case, I believe that the best people in any field are those who are driven first by their passion and calling.
IT'S HOW THEY EARN IT
As a corporate governance advocate, it has never been my concern if someone is well paid and earns it in the right way. I would be outraged if someone makes a lot of money but does so in an illegal or unethical manner, where it is not related to appropriate measures of performance, or the pay determined is through a contaminated process.
The corporate sector suggests the following "best practices" which should be followed in setting senior executives pay:
- An "arms length" process for determining remuneration policy and packages
- Benchmarks used should be comparable (similar job responsibilities, similar size and industry, etc)
- There should be a reasonable mix of short- and long-term pay
- Pay should be based mainly on factors within the executive's control
- Performance measures used for evaluation should have strong links with the corporation's long-term performance
- There should be minimal benefits and termination payments that are generally unrelated to performance
- There is good disclosure and transparency
A private sector approach which treats running a country as equivalent to running a corporation is, of course, flawed to start out with. After all, a government can always print money, raise taxes, determine whether it wants to make a profit (budget surplus) or a loss (budget deficit) and so on.
Tying ministerial bonuses to annual GDP growth can create the same perverse incentives as tying CEO pay to annual revenue growth. For example, it can lead to incentives to invest in projects with high economic payoffs, but with attendant high social costs and under-investing for long-term growth.
Firstly, our massive import of foreigners - which leads to economic growth, but strains our public infrastructure such as housing and transport.
Secondly, our two new casinos - which lead to economic growth, but also cause a variety of social ills such as crime, gambling addiction and the destruction of families.
What's also quite tragic is that many Singaporeans still don't realise that high economic growth doesn't necessarily translate into a better standard of living for citizens in general. High economic growth simply means that:
(1) Companies are producing and selling more goods and services; and
(2) The government gets to collect more corporate taxes.
Normally, (1) means that citizens get to earn more money, because successful companies can pay better salaries and bonuses and hire more employees. However, if labour & immigration policies are extremely lax, the companies don't actually pay citizens better, and won't invest in training them. Instead the companies will just hire plenty of cheap foreigners who earn a very large part of the extra money that might otherwise have gone to the citizens.
Normally, (2) means that the government has plenty of extra money which it can reinvest in society and redistribute to the people, for example, in areas such as education, healthcare and housing. However, if the government has the obsessive mindset that every extra cent must be channelled into the reserves and the reserves must never be touched until the end of the world has arrived, well, basically the people won't gain any benefit from (2).
Other problems are that high economic growth typically leads to increased inflation, which means that the cost of living escalates (hmmm, coincidentally that was the top election issue in Singapore) and furthermore the wealth created by a high GDP doesn't necessarily get distributed evenly across society (i.e, the rich get richer, and the poor get poorer - and guess which country holds the world record for having the largest income gap?)
But I digress. Back to Mak's article:
But if we are determined to follow a private sector approach to setting ministerial pay, then we should go the whole nine yards and adopt similar sound pay practices, which could involve the following ....Some good ideas there, and all worth considering.
DEFER PAY, BE TRANSPARENT
One, have an independent ministerial pay committee to oversee ministerial pay policy and levels (members must be independent and perceived to be so).
Two, adopt a small number of macro performance measures which capture overall performance in a holistic way (such as average GDP growth, average wage growth, Gini coefficient and unemployment rate) and micro performance measures which directly reflect a particular minister's performance (such as traffic accident rates, average expressway speeds, admission rates of Singaporeans into local universities, percentage of low-income families owning HDB flats).
Three, tie a minister's pay primarily to his individual responsibilities and performance, based on his portfolio (a small component can be tied to more macro measures but these may be more relevant to assessing the performance of the "chief executive", that is, the Prime Minister).
Four, benchmark targets such as GDP growth to trends in comparable economies, to better ensure that improvements are not largely due to external factors (for example, a significant increase in GDP growth - just like a significant increase in a company's stock price - may be driven more by general trends in the inter-connected global economy).
Five, defer a part of a minister's pay for a number of years and put in place conditions under which the deferred pay may be reduced.
Six, eliminate or significantly reduce pensions and other benefits not linked to a minister's performance. And seven, publish a report each year on the actual amount of each minister's pay and its breakdown.
This may sound like an awfully tedious process for setting ministerial pay. Unfortunately, corporate scandals and the recent financial crisis have taught us that poorly designed pay schemes set through a flawed process and which lack transparency can create perverse incentives and undermine governance. The current approach to setting ministerial pay emulates the pay levels in the private sector but not the sound pay principles that well-governed companies follow.
There is also a simpler idea which Mak did not mention. Yes, I know that it needs some tweaks and adjustments, but basically the idea goes like this. Firstly, ensure that the civil service has a rational system for determining salaries. Secondly, extend this system to the ministers.
Why? Well, in any normal organisation (and the civil service is not different), your salary depends on where you stand, in the hierarchy. Junior employees earn less than middle management, and middle management earns less than senior management. And the most senior guy in senior management earns more than the other guys in senior management.
A minister occupies the highest position in his ministry. The Permanent Secretary of that ministry occupies the 2nd highest position. So the minister should earn a salary anywhere from 5% to 20% higher than the Permanent Secretary. Similarly, we would expect the Perm Sec to earn 5% to 20% more than the civil servants who occupy the rank immediately below him.
Now, if the pay structure of the civil service is correctly rationalised across the board (and that should be the ongoing aim of the civil service anyway), what we would get is a natural pegging of ministers' salaries to private sector salaries anyway.
Why? Because the civil service and the private sector are in natural economic competition for employees all the time. For example, government hospitals and private hospitals are continuously competing to hire doctors and nurses all the time. Government schools, private schools and tuition centres are continuously competing to hire teachers. Any ministry which wants to hire fresh grads has got to compete with private-sector companies who also want to hire fresh grads.
If civil service salaries are generally fair and competitive at every level, then pegging our ministers' salaries to the permanent secretaries (and paying the ministers incrementally more) makes good sense.
Of course, this logic will probably reveal that currently, our ministers are grossly overpaid and have been grossly overpaid for many years.
But then we already knew that. Didn't we?