The Role of Compensation Policies in Singapore's Competitiveness

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1992 30: 16Asia Pacific Journal of Human ResourcesBasu Sharma and Irene Chew

The Role of Compensation Policies in Singapore's Competitiveness  

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The Role of Compensation Policiesin Singapore’s Competitiveness

Basu Sharma and Irene Chew

University of New Brunswick, Canada National University of Singapore

This paper examines how Singapore has used compensation policies to remain

competitive and to further enhance its competitiveness It discusses evolution ofcompensation policies in Singapore, highlights central features of the current flexiblewage system, and identifies some issues that may appear to be of important concernin future.

INTRODUCTION

Singapore is a nation with very limited resources. However, it has become one of themost celebrated cases of economic development and competitive success. Increases inper capita income several-fold over the last three decades, an improved incomes distributionsituation, a positive balance-of-payment, and a hefty foreign exchange reserve are someof the indicators of this success. One important question, then, arises: what factors areresponsible for making Singapore such a success story? The role of export-orientedindustrialization, foreign direct investment, the state corporatism, weaker distributionalcoalitions, confucianism, and communitarian ideology are some of the factors identifiedin the literature (Lodge, 1987; Chan, 1987; Hicks & Redding, 1983).

In our view, while several factors have made contributions to the competitive successof Singapore, human resource management has been the key strategic factor. Of the manydimensions of human resource management-such as planning, recruitment and selection,training and development, and compensation-compensation is at the centre because ithas important implications for motivation, job effort, and performance on the one hand,and for cost structure of enterprises on the other. Hence an understanding of the successstory of Singapore requires a knowledge of the compensation system in Singapore.The object of this paper is to examine how Singapore has used compensation policies

to remain competitive and to further enhance its competitiveness. The paper has four sections.To sharpen the focus of discussion, we present some of the theoretical underpinningspertaining to the issue in the following section. The second section contains a discussion.of characteristics of compensation policies in Singapore. The interface of compensationpolicies and competitiveness is examined in the third section. Current issues in compensationpolicies in Singapore are identified and discussed in section four.

THEORETICAL UNDERPINNINGS

What factors determine the competitiveness of a nation has become one of the key questionsfrequently asked these days in academic and policy-making circles. Researchers have identifiedand discussed a host of factors as the determinants of competitiveness. Time, technology,product quality, cost of capital, national savings rates, ideology, and style of labour-

management relations are some of them. -

Given the large number of variables determining international competitiveness of a nation,the question of relative importance of these variables arises. There is some consensus among

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researchers that relative unit labour cost ultimately determines competitiveness (Watanabe,1991; Klein, 1988; Eilon, 1992). In fact, capital inputs amount to no more than 30 percent,while labour accounts for at least 70 percent of total costs (Blinder, 1990). This factoralone therefore can make a significant difference regarding international competitiveness.Put differently, given mobile capital and easily transferable technology, labour becomesthe only significant basis for ’comparative advantage’ in today’s highly interdependent world(Mazur, 1988).Two influential recent writings-Porter (1990) and Klein (1988)-also point to the fact

that compensation is one of the key determinants of competitive success of nations. Porterhas recently developed a dynamic diamond model of competitive advantage. In this model,four factors-factor conditions, demand conditions, related and supporting industries, andcompany strategy, structure and rivalry-account for relative competitiveness of nations.He has also identified various variables under each of them where compensation figuresprominently under factor conditions. According to Porter ( 1990:10), ‘To achieve competitivesuccess, firms from the nation must possess a competitive advantage in the form of eitherlower costs or differentiated products that command premium prices.’ Klein (1988) hascogently argued that analysis of competitiveness can be meaningfully conducted by examiningfour variables-unit cost, labour productivity, profit margin, and exchange rate. To him(1988:309), ’In the final analysis, competitiveness is determined by relative prices, for givenproducts, between country pairs.’

Competitiveness entails efficiency. But efficiency is, to a certain degree, a result of faircompensation. Put differently, employment relationship is an exchange relationship. In anexchange relationship, equivalent rewards net of costs on both sides are expected (Blau,1955). Employers and employees exchange gifts of wages and efforts. But employees willwithdraw efforts if they perceive that they have not been fairly compensated. Conversely,they will increase supply of efforts if they believe that their efforts will be rewarded ina just manner. Thus both equity theory and social exchange theory predict worker behaviouralong this line (Akerlof & Yellen, 1990). Efficiency and equity are the two core considerationsin compensations policies. The crucial question to ask in this respect is how a balancebetween the two is established.The literature on compensation and wage determination is replete with the view that

markets left to themselves can do the job most of the time. This view assumes the marketto be the most efficient allocative mechanism. However, the efficiency of the marketmechanism is sometimes questioned. Those who question it believe that institutions andinterventions are necessary to achieve the objective of balancing efficiency with equity.Collective bargaining and incomes policies are cases of institutions and interventions usedin achieving this objective.How Singapore has established the balance between efficiency and equity to enchance

competitiveness is the focus of discussion in the following sections.

CHARACTERISTICS OF COMPENSATION SYSTEM IN SINGAPORE

The compensation system in Singapore evolved basically from that of the British. Fixedannual increments were traditional only in the white segment of the colonial government.They were granted to encourage loyalty and to reward seniority. The daily rated workerswere basically on a fixed rate with provision for a small increase only after stipulated periodof service.

’

The immediate post-war years saw industrial disturbances, mostly in the public sectorand the statutory boards, such as the old Singapore Harbour Board, the Telephone Company,and the Municipality. The advent of post-war trade unionism found itself centred on.thesestatutory boards, and major trading and importing houses, where, under union pressure,fixed salary increments were introduced, following the pattern in government. In a well-

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documented case before the Industrial Arbitration Court around 1960, an award was handeddown covering daily rated employees in the Straight Times Group, introducing fixed annualincrements on a time scale basis. That set the pattern and, with the two major factionsin the labour movement then fighting for ascendancy, neither faction was prepared to acceptanything less.There had been no deliberate attempt by the government to intervene in the wage

determination process in the early 1960s. However, the demands of economic growth andemployment creation after political independence in 1965 forced the government to reviewits stand on the wages policy. To create employment, the government embarked on anexport-oriented industrialization program. Attempts were made to create ’ideal conditions’to attract labour-intensive industries in Singapore. A broad package of measures wasimplemented, and one of them was informal wage restraint. Both the Employment Actand Industrial Relations Act were amended in 1968 to establish the working conditionsin Singapore and control wages, bonuses and fringe benefits.The economic strategy formulated in the late 1960s worked. There was prosperity and

near full employment due to sustained domestic and foreign investment. The increasingtight supply of both skilled and unskilled labour resulted in a general tendency for wagesto increase. It was foreseen that a wage explosion might arise if the situation was left

unchanged.To avoid a wages explosion, the government decided to establish the National Wage

Council in 1972 (Lim, 1991). This tripartite council was comprised of a chairman and ninemembers, three representing workers, three representing employers, and three representinggovernment organizations. The NWC had no statutory power. It was mainly a negotiatingbody facilitating negotiations on wages and benefits between labour and management withthe government playing the role of a third party (Anantaraman, 1990). The NWC was toserve as an advisory body to the government with the following terms and conditions:

~ to assist in the formulation of general guidelines on a wages policy;~ to recommend necessary adjustments in wage structure, with a view to developing a

coherent wages system consistent with long-term economic development; and~ to advise on desirable incentive systems for the promotion of operational efficiency and

productivity in various enterprises.

In the period 1972-78, the NWC made six main sets and two interim sets of wagerecommendations, all of which were accepted by the government. The main

recommendations on wage increases are summarized in Appendix 1. These recommendationswere intended to serve as a general basis for negotiations between employers and employees.Though not mandatory, the NWC recommendations were implemented extensively. Duringthis period, the NWC concentrated on fine tuning the national wage guidelines with offsettingprovisions and blazing new trails in suggesting disincentive schemes to control workers’behaviour to ensure industrial discipline (Anantaraman, 1990).

In the latter part of the 1970s, the industrialization strategy of the government changed.The emphasis shifted from labour-intensive manufacturing exports to skill- and capital-intensive manufacturing exports. This is often dubbed as the second industrial revolutionin Singapore. And the NWC recommended a three-year wage correction policy wherebywages were to be increased by 20 percent annually across-the-board to induce more efficientuse of labour. This strategy was too simplistic. Singapore did not have the technologicalinfrastructure to move up so quickly to skill- and capital-intensive industrialization. As aresult, productivity growth lagged behind wage increases. The economy began to run intoproblems, culminating in a negative growth of gross domestic product in 1985.The performance of the economy in 1985 sent shockwaves through various quarters.

The government took the message to heart. To review the progress of the Singapore economy,

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a tripartite economic committee, comprising members of the government, private sector,and the unions, was appointed. One of the sub-committees examined the weaknesses ofthe past compensation system, and made recommendations for wage reform.Under the traditional wages system, wages were determined in the organized sector through

collective bargaining under the Industrial Relations Act. Over the years, the collectiveagreements, generally of three years’ duration, had provided not only high but fixed annualincrements (AI) in the wage system. The increments were determined at the time ofnegotiations and employers were obliged under the Act to pay them irrespective of theoperating circumstances during the life of the agreement. Wage increases were based onseniority of service rather than for company or individual employee performance. Thuspredetermined annual increments were paid without any consideration for affordability.Furthermore, the NWC annual wage increase guidelines were largely implemented across-the-board without sufficient regard to company and individual performance. Anotherimportant component of compensation was the annual wage supplement (AWS). It was

originally a year-end bonus. When the Employment Act was amended in the early 1970s,the quantum payable at that time was fixed at not exceeding three months’ wages. Hencethe AWS became a ’frozen quantum’. Over time, it was viewed by employees and someemployers as deferredwage. Thus the AW5 became fixed and could not be adjusted downwardeven though the Employment Act made provisions to do so (Magota & Suzuki, 1988).

It has been argued that the traditional wages system consisting of (i) a basic wage,(ii) annual NWC wage adjustments, (iii) merit payment, (iv) fixed annual wage supplementor bonus, and (v) automatic annual wage increases, had built-in rigidities. This made itdifficult for employers to adjust the wage structure during economic fluctuations, whichresulted in loss of international competitiveness, loss of jobs, retrenchment and prolongedunemployment of older workers. To overcome these rigidities a flexible wages system wasproposed by the subcommittee on Wage Reform.

According to the recommendations of the subcommittee on Wage Reform, the flexiblewage system was to reflect the value of a job; wage increases were to lag behind productivitygrowth; company profitability and individual performance were to be taken into considerationwhen granting wage increases; wage increases for company’s or individual’s performanceshould not always be given on a guaranteed basis; and there should be a measure ofstability in the worker’s income. The subcommittee also recommended that salary rangeshould not be very wide. A ratio of 1.5 times between the top and bottom salary on eachscale was considered reasonable.The proposed flexible wages package would comprise, four components. First, there

was a basic wage component to reflect the value of the job and to provide a measureof stability to the workers’ income. Secondly, there was an annual wage supplement (AWS)of one month’s pay which could be adjusted under exceptional circumstances. Thirdly,there was a variable bonus based on company profitability and/or performance to be paidyearly or half-yearly. For example, if a company performed consistently well, it could paya bonus of two months’ wage each year. The bonus and the AWS would then add upto three months, thereby making up to 20 percent of total wages (3 months out of 15)variable. Finally, a small service increment of 2 percent could be given each year for loyalty,experience, and length of service.The flexible wages system considered four key factors, namely wage structure, system

factors, human factors, and industrial relations factors, all of which had to be addressedbefore a flexible wages system could be successfully implemented in an organization. Thewage structure consists of two main parts-fixed and variable. The variable componentacts as the ’buffer’ or ’shock absorber’ which can move up or down depending on companyperformance. It also links performance to productivity and profitability, and motivates workerstowards high performance. The fixed component responds to the supply and demandconditions in the labour market. Support systems, such as the system for measuring profit

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or productivity, a system for performance appraisal, a system for employee communications,and a system for sharing rewards based on performance, are important for the successof flexible wages system. The human factor is the single most important factor in reformingthe wages system. In order to assure workers that the system is fair and just, the sharingof company information, regarding, for example, profit and productivity performance, is

crucial. A harmonious industrial relations system is necessary, as only with mutual trustand close co-operation between management and union can a flexible wages system besuccessful. For example, under the flexible wages system, company profitability andproductivity become the main determinant for the variable wage component. The companyhas to be honest in sharing sensitive information such as profit and loss with workers,and has to incorporate information sharing as a feature of the corporate culture (Lee, 1988).There are two types of flexible wage models used in Singapore-profit-sharing and

productivity models (Lee, 1988). Companies using profit-sharing model pay bonuses onlywhen profits exceed a predetermined threshold. A number of measures have been usedto set this threshold, including return on investment, return on assets, and the averageprofits earned over a number of years in the past. Usually, the amount of bonus to bepaid is related to the magnitude of the profits. Companies using a productivity modelgenerally use national productivity as a proxy for the company productivity. Companieseither negotiate wage increases annually or agree with unions that the wage increase shouldlag behind the national productivity by a fixed percentage. However, there are some variationsas to how companies link their bonuses to profitability or productivity.As at 1990, 70% of all companies in Singapore had implemented a flexible wages system

(Ong, 1990). Both the Singapore National Employers Federation and the National TradeUnion Congress have been encouraging others to do the same.

THE INTERFACE OF COMPENSATION POLICIES AND COMPETITIVENESS

Compensation policies have become an indispensable part of the overall industrializationstrategies in Singapore. Throughout the last two and a half decades, the wages policy hasplayed a very strategic role.

After Singapore left the Malaysian Federation in August 1965, the PAP government decidedto embark on a program of rapid industrialization by encouraging multinational corporationsto invest in Singapore. As the immediate problem was to reduce the then prevailing highlevel of unemployment, a labour-intensive type of investment was promoted. Incentivesenabled Singapore to attract a lot of foreign direct investment in labour-intensive industries,which helped solve the problem of unemployment.By the early 1970s, full employment was reached. The labour market became tighter,

putting an upward pressure on wages, and the NWC was established in 1972 to developan appropriate wages system. The economy depended increasingly on foreign and femalelabour. Also, the comparative advantage of Singapore in low-wage manufactured exportswas gradually being eroded due to the new competition from the low-wage second-tierSoutheast Asian countries such as Malaysia and Thailand. Consequently, the govemmentwas forced to restructure its industrialization policy by phasing out low value-added, labour-intensive manufacturing industries and by promoting high value-added capital-intensiveones. The policies adopted to achieve this goal included promotion of investment in researchand development, establishment of Skills Development Fund, and use of the NWC as ameans of raising wages ahead of productivity so that companies would be forced to upgradeand to move ’upmarket’ (Rigg, 1988).During the period 1972-78, the NWC adopted a Wage Restraint Policy. This was to forestall

wage escalation and to ensure orderly wage increases. Total labour costs is real termsincreased on average by 1.2% per year and real productivity increased by 2.7% annuallyduring this period. The NWC adopted a high wage or wage correction policy during the

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period 1979-81. Total labour costs in real terms on an annual average basis increased7.4% and productivity 4.8%. Even after 1981, wages continued to increase at a high rate.Consequently, the corresponding rates for the period 1982-84 were 12.8% and 4.3%,respectively. The increased wage cost resulted in a steady deterioration of Singapore’sinternational competitiveness. In fact, the Singapore economy shrank by 1.8% in 1985. Thesefigures clearly indicated that the high-wage policy backfired.When the wages system lacks sufficient flexibility, fluctuations in demand for a firm’s

output translate into employment variations. In an economic downturn, employers are morelikely to reduce employment. This is precisely what happened in Singapore during 1985-86.In the 18-month period between December 1984 and June 1986, 120 000 jobs were lost.However, the government was determined to keep business internationally competitiveand to avoid another recession. Its objective was to reform and restructure the wages systemto ensure flexibility to absorb the changing economic circumstances and to enhancecompetitiveness and ensure job security.The government reduced the employers’ central provident fund (CPF) contribution from

25% to 10% in 1986. The NWC, at the same time, recommended a wage-freeze for allworkers for two years. Since 1972, employees had been accustomed to a yearly wageincrement of 8% to 10%. The wage-freeze together with the reduction in employers’ CPFcontribution amounted to a drastic 20% pay cut across the board. No other country couldhave instituted such a policy without any industrial unrest. However, the support of thelabour movement and the goodwill earned by the NWC helped to implement the wage-freeze CPF-reduction policy in Singapore.

Following the freeze, the new flexible system was implemented. About 15% of totalwages were paid in the form of bonuses in 1989 and 1990. For the unionized sector,the proportion was slightly higher-18.5%. This is only 1.5% less than the target set bythe NWC sub-committee on Wage Reform (Ministry of Labour, 1990). Singapore’s economygrew at a rate of 1.8% in 1986. By the end of 1987, the economic performance had improvedquite significantly, registering a growth rate of 8.8%. This continued further with growthrates of 11.1% in 1988 and 8.3% in 1990. With the economic recovery, the labour market

began to become tighter. The unemployment rate in 1990 was just about 2%. The pressureon wage increases has begun to appear again.

Table 1 presents data on wage increases, inflation, and productivity for the period 1985-90.Real basic wage increases began to exceed productivity growth in 1988. This trend hasnot been reversed yet. However, the widening wage-productivity gap has once again becomea matter of concern for the NWC. In fact, the 1991 NWC recommendations transmittedby the Chairman of the NWC to the Prime Minister of Singapore noted a need to moderatewage costs in order to maintain the competiveness of the economy.

Table 1 Wage increases, inflation and productivity in Singapore, 1985-90

Source: Ministry of Labour (1990), Report on Wages in Singapore, 11.

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ISSUES AND CONCERNS

As the economy matures, Singapore may not only have to look at some of the old problemsin new ways but she may also have to face new issues and challenges. The immediatechallenges would include questions related to compensation for executives, expatriates,scientists and engineers, among others, and pay equity.With the growing prosperity of the nation, the fortunes of Singapore’s top executives

have also been improving. According to World Executive’s Digest’s annual compensationsurvey, Singapore’s top management executives were the highest-paid in Asia except forthe Japanese executives in 1990 and 1991 (Teo, 1992). As described by Lodge (1987),Singapore practices the ideology of communitarianism. Unlike the ideology of individualism,the communitarian ideology is supposed to attach more importance to psychic and socialsecurity through corporate membership rather than personal wealth maximization, ofteneven at the cost of corporate loyalty. Whether executive compensations in Singapore willfollow the Japanese trend or the American one in future will be a matter of concern asthe former conforms to the ideology of communitarianism and the latter to the ideologyof individualism.Females account for about 40% of the total labour force in Singapore. Their labour-

force participation rate has been increasing over the years. However, females on the averageget paid less than 70% of what their male counterparts are paid. The wage gap is thegreatest in the manufacturing industries. By occupational groups, it is the greatest foradministrative and managerial jobs. As Singapore joins the ranks of the developed countries,questions of equity and social justice will be asked with increasing frequency.

Singapore wishes to establish itself as the leading science and technology centre in theASEAN region. The labour market for scientists and engineers is supply-dominated. Thegovernment has identified a need to develop, attract, and retain human resources in thiscategory. However, how to compensate scientists and engineers may also command someattention in future as compensation greatly influences choice behaviour in the labour market.Given the large number of expatriates working in Singapore at present and the possibilityof continued demand for them because of an aging population coupled with a tight labourmarket, expatriate compensation will continue to attract attention.

CONCLUDING REMARKS

The role of compensation policies has remained central in the modem economic

development of Singapore. First, the NWC was created to facilitate the process of wagenegotiation at the national level in a corporatist manner. Secondly, wages policies formulatedthrough negotiations at this level were filtered down through employers’ associations andtrade unions whose representatives are party to the negotiations at the national level. Thirdly,shifts in industrialization strategies were accompanied by appropriate wages policies. Therehave been three wages policy regimes so far: the wage restraint regime, the wage correctionregime, and the flexible wage regime. Each regime served a specific purpose.The impetus for the current flexible wages system in Singapore came from the government’s

concern with competitiveness. The primary aims of this system are to remain cost-competitiveby being flexible enough to meet and adjust to changes in business conditions, to becomecost-effective by linking financial rewards to the profitability of the company, and to improvestaff motivation by linking financial rewards to the performance of individual employee.This system is supposed to enable employers to cut labour costs during lean times withoutresorting to retrenchment.However, with a tight labour market and full employment, management has the unenviable

task of ensuring the adequate supply of human resources to the company. The mostappropriate way of attracting workers is through higher salaries-the pay cheque whichthe company offers must be commensurate with prevailing market rates. But when there

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is a widening differential between wages as determined by the models employed andwages as dictated by the market forces, a real possibility for some cracks in the systemexists. Nevertheless, it may be expected that the Singapore govemment will come up withsome fillers to mend the cracks as in the past.

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Appendix 1 NWC wages recommendations,1972-85 ’

Source: Ministry of Labour, Annual Reports.

Basu Sharma earned his PhD in Industrial Relations at the University of Illinois at Urbana-Champaign.He is a Visiting Senior Fellow in the Department of Organisational Behaviour at the National Universityof Singapore, and an Associate Professor of Industrial Relations and Human Resource Managementin the Faculty of Business Administration at the University of New Brunswick, Canada. Articles byDr Sharma have appeared in a wide variety of journals and he has contributed chapters to manyedited volumes. He is the author of Aspects of Industrial Relations in ASEAN which has also beentranslated into Japanese.

Irene K. H. Chew, Phd (Australian Graduate School of Management, University of New South Wales),is a Senior Lecturer in the Faculty of Business Administration at the National University of Singapore,where she teaches graduate and undergraduate courses in organizational behaviour and humanresource management. She has worked for nine years in commercial organizations in Singapore andEngland Irene Chew has published in international journals on job design, leadership, stress and humanresource management. Her current research interests include stress and human resource managementin the ASEAN region, career management, and compensation. She also acts as a consultant/trainerfor organizations in the public and private sectors.

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