25 January 2012

Ministerial Salaries Review — Do Most Roads Lead to Rome?

Almost everyone has his own opinion on how to determine the salaries of political office holders, especially cabinet ministers.

Do most roads lead to Rome (figuratively not literally)?

The Ministerial Salaries Review Committee
The 2011 Committee set up by Prime Minister Lee to review the salaries of the president, prime minister and other political office holders used the median salary of the top 1,000 citizen income earners and applied a 40 per cent discount for public service ethos to arrive at a typical salary of $1.10 million for an MR4 political office holder.  The salaries of all other political office holders were fractions or a multiples of the MR4 salary — ranging from 0.38 times for a parliamentary secretary to 2.00 times for the prime minister.

The Committee's reason for picking the top 1,000 citizen income earners was that political office holders are likely to come from this group.  Some people say this is an elitist perspective, in which case, referencing the 500th highest income earner (which is the median of the top 1,000 income earners, see note 1) is even more elitist.

The Committee did not explain why it used the median salary instead of the salary of the 1,000th highest income earner, but the rationale is rather apparent.

The Committee applied a 40 per cent discount for public service ethos.  The Committee did not explain why it used 40 per cent, but the rationale is rather apparent.

Taking its assumptions in their entirety, the Committee arrived at a typical salary of $1.10 million for an MR4 political office holder, and opined that it satisfied its three underlying principles (i.e., competitive salaries, public service ethos and clean wage).

Is it competitive?  With a salary of $1.10 million, the MR4 political office holder would have been the 1,410th highest income earner in 2010.  Changing the assumptions would have placed the MR4 political office holder being ranked higher or lower than 1,410th in 2010.  But the Committee was reasonably happy with the end result of $1.10 million and 1,410th place.

Presumably, the Committee was reasonably happy with its proposal to pay the prime minister 2 times MR4, or $2.20 million in 2010, placing him at 382nd highest income earner.

The Workers' Party
The Workers' Party set the Member of Parliament's allowance salary at the civil service's MX9 salary of $11,000 per month (it is not clear whether this is the MX9 salary in 2010 or 2011).  This is supposed to be a whole-of-government approach, since The Workers' Party believed that civil service salary is aligned to general market conditions faced by Singaporean workers.  Accordingly, the MP's allowance and ministerial salary will move with the income levels of many more Singaporeans than with the income levels of the 1,000 top income earners.

An MR4 political office holder's salary will be 5 times MX9 salary (i.e., $55,000) and the prime minister's salary will be 9 times MX9 salary (i.e., $99,000).  All political office holders will be paid a fixed 13th-month salary plus a variable bonus of up to five months.

The Workers' Party mistakenly believed that the $11,000 per month salary was the 80th percentile salary of the citizen income earners, when it was the 80th percentile resident household income.

The main difficulty with The Workers' Party's proposal is not, in my opinion, whether $11,000 per month was more representative of the wage level of the general population than the Committee's $1.83 million per year ($1.10 million after adding back the discount for public service ethos).

Although $11,000 per month places an MX9 officer on the national pay scale somewhere above the 80th percentile and although it forms the basis of an MR4 political office holder's salary of $55,000 per month, the fact is that $55,000 per month is much above the 80th percentile even though it is lower than the $1.10 million.

5 times MX9 salary is further away from the wage level of the general population than MX9.

And 5 times MX9 salary changes from one year to the next 5 times as fast as MX9 salary.

But so long as 5 times MX9 salary is less than the salary of the 500th highest income earner discounted 40 per cent, The Workers' Party's proposed MR4 salary is unlikely to rise as fast as the Committee's proposed (now adopted) MR4 salary.

(The same reasoning applies to using a multiple of any other salary below $55,000.  Suppose one started with the median income from work of full-time employed residents in June 2011 of $2,708.  After applying a multiple of 20 times — to produce a desired outcome of $54,160 for MR4 salary — the result is no longer representative of general wage levels.  Because of the widening income divide, it is possible for the reference salary to stagnate or fall even while the total income of the 500th highest income earner rises.)

Member of Parliament Denise Phua
Ms Denise Phua described the Committee's benchmark, which represents 0.05 per cent of the 2 million-strong workforce, as smacking of elitism.

She suggested that the salary of an entry level minister should be tied to the wages of a broader group of Singaporeans, e.g., the 80th or 90th percentile, without any discount.  The application of a discount is arbitrary and often forgotten and unappreciated.  Many Singaporeans are likely to understand and accept that their political leaders belong to the top 10 per cent or 20 per cent income bracket in our country.

Unfortunately, Prime Minister Lee had already said that the Government would adopt the Committee's proposals.  In any event, her proposal would not have been considered.

First, the 80th or 90th percentile total income would have been far below $1.10 million.

Second, it removes the discount for public service ethos.  Although Ms Phua believes that this discount is often forgotten and unappreciated, it is something that politicians can claim that they have sacrificed for the public office.  In other words, most politicians probably prefer the Committee's MR4 salary of $1.10 million which incorporates a 40 per cent discount for public service ethos than a benchmark salary at the 1,410th highest income earner of $1.10 million without any discount for public service ethos, even though the salary is the same in both cases.

Even so, Ms Phua's suggestion is rather arbitrary.  Why 80 per cent or 90 per cent?  It depends on what the final result is — and then a judgment whether that number is fair, reasonable and competitive.  But, fair, reasonable and competitive from whose perspective?

Benchmarking against foreign political leaders' salaries
Benchmarking against the salaries of foreign political leaders seems more logical at first glance.  Perks are only a minor obstacle, as their value may be imputed, even if this can't be done completely or precisely.

The major difficulties are similar: (i) which political leader should Singapore benchmark its prime minister's salary against — the highest; and (ii) what premium, if any, will be applied?

These are judgemental or arbitrary decisions that will be made with an eye on the end result.

Cynicism about how other countries' political office holders are paid have no place in our debate.

First, perks.  British Members of Parliament are paid "low" salaries topped up by "generous" benefits.  The official explanation for the benefits is that the MPs have to maintain a separate home and office in London if their constituents are hundreds of kilometres away.  The "understanding" was that, so long as they could submit some documentation for their expenses, they could claim the benefits as "a way to work the system".  Not a few MPs may have abused the system, but this is a reflection of their ethics and the ethical standards, and it appears contrived to infer that the benefits were intended to compensate the MPs in an environment where the public would not have tolerated any attempt to pay them higher salaries.


What about the perks for the US president, such as the use of Air Force One and Camp David?  Singapore is such a small country that, if the prime minister were to ask for similar "benefits", he would be the international laughing stock.  Besides, Air Force One is not just an airplane and Camp David is not just a resort for presidents.

Second, retirement gold mine.  It was said that a minister in the ruling Conservative Party alluded to British Prime Minister David Cameron's "not small" earning potential when he leaves office.


It was said that US presidents earn many times their salaries when they retire; all they have to do is turn up for an appearance.  American politicians fight hard to earn the privilege to lead the country as its president.  It is doubtful if any of them have such aspirations because of the money they can earn when they complete their terms in office.  There is no assurance that they, or their cabinet secretaries, can earn many times their salaries when they retire.

If intelligent people are prepared to pay princely sums to listen to former heads of government, it must have something to do with the experience and the insights they gained whilst in office — insights that are derived from the challenges of their office.  If their experience or insights are not worth paying for, perhaps they had failed or the challenges were simply not challenging, extraordinary or different.  This is true whether we are talking about the US president, the British prime minister, the German chancellor, or the Singapore prime minister.

Conclusion
Most of us, if we are reasonable, have some idea what fair wages — wages that will give them a fairly comfortable lifestyle — for the respective political office holders are.


Whatever method is used, we look at the final result and determine whether we think it is fair.  In other words, the fairness (to us) of the final result determines whether our assumptions and method need to be changed.

Whilst the Committee and The Workers' Party arrived at broadly similar salary frameworks, their proposals are not the same, as may be seen from the following comparison:


The numbers may seem to be in the same ballpark, but the differences are not insignificant.

The variable components of the salary framework are different in quantum and in how they are awarded.

Finally, the salaries for the respective political office holders in the Committee's recommendations on the one hand and The Workers' Party's on the other will probably diverge over time because they are benchmarked at different points of the income spectrum, and it is likely that the higher the reference income, the faster it increases.  The Committee's MR4 benchmark is 0.6 times the total income of the 500th highest income earner whereas The Workers' Party benchmark is 5 times MX9 (which is significantly less than the Committee's benchmark).

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Notes

1. The median of the top 1,000 income earners is the mid-point between the 500th highest income earner and the 501st highest income earner.  However, for convenience, I will refer to the median as the 500th highest income earner.


2. The salaries of the political office holders based on the Committee's framework are salaries that would have been paid in 2010 had the Committee's framework been accepted and implemented.  The income ranking is based on total income for Year of Assessment 2010 i.e., income earned in 2009.

3. It is not clear whether The Workers' Party's MR4 base salary of $11,000 is based on the MX9 salary in 2010 or 2011.  However, I have assumed it is 2010 to facilitate comparison.

3 comments:

  1. The committee AND the govt probably decided beforehand on how much to cut and 'reversed engineered' in its selection of earners to get the 'answer' they want!

    Note the speed at which the PM agreed to it.

    ReplyDelete
  2. So, another of the situate the appreciation rather than appreciate the situation. Par for the course.

    Saycheese

    ReplyDelete
  3. Hmmm ... so whom should we vote? PAP again?

    ReplyDelete