11 January 2012

Ministerial Salaries Review — Salaries for a Capable and Committed Government

This article examines some of the details in the report "Salaries for a Capable and Committed Government" dated 30 December 2011.

THE PROCESS

The Committee's view is that $1.10 million in 2010 would have been fair salary for a MR4 political office holder, placing him at the 1,400th highest income position.  Why $1.10 million?  Because the Committee thinks that salaries must be competitive — that competitive — to attract talented people to serve as political office holders.

It is arguable whether talented people — as determined by the salary they earn or indeed by most other measures — are the right political leaders for Singapore.

It is arguable whether people who need ministerial salaries much higher than those for a reasonably comfortable lifestyle to step forward to serve the country in political office are the right political leaders for Singapore.

Once the Committee decided not to benchmark ministerial salaries against the salaries of world leaders, the entire exercise became subjective.  Who was to say whether MR4 should be $1.1 million rather than $1.5 million or $0.5 million?  Moreover, it is arguable whether the Committee was in a position to determine what constituted the right political leadership for Singapore, and in this respect, the Committee probably used the incumbents as its target candidates.  Did the Committee tailor the proposed salaries to fit the incumbents?  [This paragraph was inserted on 13 January 2012.]

THE PROPOSED BENCHMARK

500 not 1,000
The proposed MR4 salary will be the median salary of the top 1,000 income earners, discounted 40 per cent.

The Committee's rationale is that the top 1,000 income earners reflect the calibre of people needed for good government.

The median salary of the top 1,000 income earners is the salary of the 500th highest income earner.  (More precisely, it is the average of the salary of the persons with the 500th and 501st highest income earners).

When determining the benchmark in the future, the government will be looking at the salary of the 500th highest income earner.  Everyone else earning less doesn't matter at all.

Let's be precise: we are not looking at the top 1,000 income earners but the 500th highest income earner.  This distinction is important because some people think that the proposed MR4 salary will be based on the group comprising the top 1,000 earners.

Of course, the median salary of the top 1,000 income earners has better political appeal than the salary of the 500th highest income earner, although both mean the same thing.

The Committee may have been confused by the present system.  The 2/3M48 benchmark is set at two-thirds of the salary of the 24th highest earner (strictly speaking, this is not the median, which is the average of the 24th highest and the 25th highest) among a group comprising the top eight earners from six professions (namely bankers, accountants, engineers, lawyers, employees of local manufacturers and employees of multinational corporations).  The 24th highest earner is not necessarily the lowest earner among the 24 persons comprising the top four earners in the six professions (e.g., the fifth highest earner in one profession may earn more than the fourth highest in another); hence, the concept of taking the median of the group of 48 persons.

Future benchmarks
The proposed MR4 benchmark would have resulted in a salary of $1.10 million in 2010.

It is anyone's guess what the result will be this year or in the future.

However, it is very probable that the salary of the 500th highest income earner will rise faster than the salary of the 1,000th or the 1,400th highest income earner, or the median salary.

Always the 500th
Although the 500th highest income earner in any one year is unlikely to occupy the 500th income earner position in the following year, the proposed MR4 benchmark will always be the 500th highest income earner.

Other ministers
The proposed salary for the prime minister is twice the MR4 benchmark.  Ignoring the variable component (since the prime minister's salary has double the National Bonus in lieu of the performance bonus), his fixed salary will increase at twice the annual rate of the MR4 benchmark.

Similarly, the proposed salary for the deputy prime ministers will increase at 1.70 times as fast as the MR4 benchmark.

What income is included?
The current benchmark looks at the principal earned income of the top earners.  Only income from their principal profession / trade is included; income from other employment is excluded.

The proposed benchmark will look at the total employment and trade income of the top earners, and will no longer include a 50 per cent discount on stock options.  The reason given is that the new benchmark does not focus on specific professions but on the total earning capability of the individuals.

In both cases, income includes monthly salaries, bonuses, commissions, stock options and partnership income but excludes unearned and passive forms of income such as dividends, rent and interest.

Who are included
The current benchmark looks at individuals from six professions — bankers, accountants, engineers, lawyers, employees of local manufacturers and employees of multinational corporations.

The proposed benchmark looks at all citizens regardless of profession.  It will include high-income earners such as doctors and architects.

The current benchmark looks at citizens, permanent residents and Malaysians working in Singapore.  The proposed benchmark looks at citizens working in Singapore only.

Ranking [this section was added on 13 January 2012]
Based on the revised framework, the MR4 political office holder would have been the 1,400th highest income earner in 2010. The prime minister and the deputy prime ministers would have earned more than the 500th highest income earner.

Based on the actual salaries earned in 2010, all cabinet ministers above MR4 would have earned more than the 500th highest income earner.

Pegging to salaries of other political leaders [this section was added on 14 January 2012]
The Committee decided not to peg the salaries of political appointment holders to those of foreign leaders because conditions in those countries and compensation principles were different.  Specifically, it would not have allowed the Committee to follow the principles of paying competitive salaries and clean wages.

First, every country has its unique set of circumstances.  Is Singapore really more difficult to govern well than other countries?

Second, there is nothing to prevent the Committee from converting perks received by foreign leaders into equivalent salaries.

Third, as for not allowing the Committee to pay competitive salaries, it goes back to the Committee's primary assumptions that potential MR4 grade leaders will be drawn from the top 1,000 (or top 500 as I have discussed above) income earners, and the MR4 salary should be the salary of the 500th highest income earner, discounted 40 per cent.

NATIONAL BONUS

The National Bonus has four components —
a. Real GDP growth rate
b. Citizen unemployment rate
c. Real median income growth rate
d. Real growth rate of the lowest 20th percentile income

Real GDP
GDP or per capita GDP?
Much has been said and written about using real per capita GDP instead of real GDP.

First, we do not want Singapore to be flooded with hordes of foreign labour, just to raise GDP.

Second, the government's message has been productivity growth.

Counting GDP twice
GDP appears twice in the proposed salary package — first in the annual variable component (typically one month, maximum 1½ months) and second in the National Bonus.

Unemployment
The Committee's targets for unemployment are generous in light of historical unemployment rates — see Ministry of Manpower's "Labour Market, Third Quarter 2011".

It is unclear whether unemployment means (i) seasonally adjusted or otherwise; and (ii) the average of the four quarterly statistics or the year-end statistic.

In an earlier article [link], I wrote that because a person can be employed or unemployed or economically inactive, the correctness of the unemployment rate depends on correctly classifying every individual aged 15 years and over in the labour force survey.  For a start, we should be clear about the precise definitions of employed, unemployed and economically inactive.

An employed person is an individual aged 15 years and over who, during the one-week reference period: (i) worked for one hour or more for pay, profit or family gains; or (ii) had a job or business to return to but was temporarily absent because of illness, injury, breakdown of machinery at his workplace, labour management dispute or other reasons.

An unemployed person is an individual aged 15 years and over who: (i) did not work; (ii) was available for work; and (iii) was actively looking for a job during the one-week reference period.

Any individual aged 15 years and over who is neither employed nor unemployed is economically inactive, and not part of the labour force.  He is not taken into account when determining the unemployment rate.

It is not easy to be unemployed — that is, to be considered unemployed by Ministry of Manpower.  Imagine a person who was retrenched.  If he manages to work for just one hour for pay, profit or family gains during the one week before the labour force survey, he is no longer unemployed, regardless whether he worked at all during other weeks in the quarter.  If he is so discouraged that he has not looked for a job during the one week before before the labour force survey, he is no longer unemployed.  For example, the US official unemployment rate in December 2011 was 8.5 per cent, but including persons marginally attached to the labour force and persons employed part-time for economic reasons, the unemployment rate was almost double at 15.2 per cent.

The conclusion is that there are probably more people who consider themselves unemployed or are unemployed in the general sense of the word than there are officially unemployed.

Median income
The Report was silent on how the real median income growth rate and the real growth rate of the lowest 20th percentile income should be determined.

What is included in income?  Is it only employment income, excluding dividend, interest and rent?

Which citizens will have their income included?  Will they be everyone who files a tax return with assessable income with Inland Revenue Authority of Singapore or everyone who is considered employed by Ministry of Manpower?  In the latter case, what about part-timers and persons who are employed only part of the year?

Both income criteria are real annual growth rates, not absolute income.  Both growth rates, in particular the real growth rate of the lowest 20th percentile income, are affected by and sensitive to part-timers, persons who are employed part of the year and persons who are marginally attached to the labour force.

OVERALL ISSUES

Pensions
Currently, political office holders who have served at least eight years are eligible for a pension.  Bonuses and allowances are not included in pension computations.  Salary increases after 1994 are not pensionable.  The maximum pension is about 11 per cent of the political office holder's "last drawn total annual package".  Political office holders receive their pension from age 55 years or on completing eight years of service, whichever is later, even if they are still in office.  Members of parliament who were elected before 1995 are eligible for pensions on reaching age 50 years.

The archaic practice of pensions will be abolished.

Political office holders who are first appointed on or after 21 May 2011 will not receive any pension.  Political office holders appointed before 21 May 2011 will have their pensions frozen (i.e., accrued up to 20 May 2011) and such pensions will be paid when they step down or retire from office.  It is unclear whether political office holders who were appointed before 21 May 2011 but have yet to satisfy the eight-year condition will be eligible to receive their pensions in the future.

Pensions will continue to be non-taxable.

Table 3 of the Report shows the salary reductions that would have taken place in 2010 had the proposed salary framework been in place then, before and after taking into account imputed pensions.  It is not clear how imputed pensions were computed given the complexity.

First, some political office holders will not get any pension while others will have their pensions deferred.  If the Committee assumed that no pension will be paid in the future, whether deferred or otherwise, then the potential salaries of the political office holders whose pensions are only deferred would have been understated.

Second, calculation of the imputed pension is specific to the respective political office holders, and takes into account a number of factors such as their respective length of service, age, expected life expectancy, and (in the case of deferred pension) expected years of service before stepping down or retirement.

Member of parliament allowance [this section was updated on 14 January 2012]
Although not explicitly stated in the Report, political office holders will be paid their member of parliament allowance in addition to their salary.

There are two contradictions.

First, the MR4 benchmark focuses on the total earning capacity of the top income earners, and will look at their total employment and trade income.  Therefore, the MR4 benchmark should include the total employment income of political office holders, including member of parliament allowance, notwithstanding that it is called an allowance.

Second, when deciding not to peg the salaries of political office holders to those of foreign leaders, the Committee said that conditions in those countries and compensation principles were different.  However, when deciding to give the member of parliament allowance to political office holders, the Committee said that it was international practice in Westminster parliamentary systems.

After taking into account the member of parliament allowance, the MR4 benchmark would have been $192,500 higher in 2010, and the discount for public service ethos would have been lower, and less than 40 per cent.

It is not clear whether political office holders elected to parliament before 1995 are eligible to receive pensions on their member of parliament allowance.

Make-up salary
In the case of an outstanding candidate from the private sector who may be earning a significantly higher salary than the salary of the appointment, the prime minister will retain the flexibility to offer him make-up salary up to 90 per cent of the difference between the salary of the appointment and his average salary in the three years preceding the appointment for up to one term in office (the current provision is for up to two terms).

Comparison with current salaries
Several issues arise when comparing current salaries of the political office holders with the proposed salaries, for example in Table 3.

First, as discussed above, how is imputed pension computed?

Second, the proposed salaries in the Report — $2.20 million for the prime minister, $1.54 million for the president, $1.10 million for entry-level ministers — are not fixed amounts. They are based on the situation that would have existed in 2010 had the Committee's recommendations been approved and implemented.

Third, the proposed salary package will result in the prime minister's salary being cut 36 per cent, the president's by 51 per cent and the speaker of parliament by 53 per cent, for example.  Were the political office holders were over-paid in the past or would they be under-paid in the future?  Inasmuch as one of the Committee's philosophical principles is that the proposed salaries have to be competitive so that highly capable individuals in their prime will seriously consider entering politics and take on political leadership roles without having pay as an obstacle, the answer is rather evident.

FINAL COMMENT

I wrote previously [link] that one possible outcome of the review would be that the Committee would recommend a level of ministerial salaries lower than current levels but higher than comparable levels elsewhere and higher than what is politically acceptable, but the prime minister will end up sensibly choosing a level that is politically acceptable.

I was partly right.  As for whether the proposed remuneration is higher than what is politically acceptable or is politically acceptable remains to be seen.  Politics is dynamic and constantly evolving.

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Notes

1. Salaries for a Capable and Committed Government Committee to Review Salaries of the President, Prime Minister and Political Appointment Holders (30 Dec 2011).

2. Press conference held by Committee to Review Salaries of the President, Prime Minister and Political Appointment Holders on 4 January 2012 (highlights telecast by MediaCorp).

3. Unless otherwise stated, the term income earners refers to Singapore citizens working in Singapore and excludes permanent residents, and Malaysians and other foreigners working in Singapore.

1 comment:

  1. The logic of politicians’ remuneration:

    You propose a formula for your own salary and present the proposal to the parliament for approval. You and your cronies have total control of the parliament. You know your proposal is definitely passed without meaningful debate.

    You propose salary formula for you and your cronies to base on a group of top earners who are mostly from GLCs and your cronies' companies. You also know that your controlled parliament will pass your proposed formula. Next thing you do is to get GLCs and your cronies' companies to pay the chief very very well. As such, your and your cronies' salary will be increased accordingly.

    After the people object to your proposal, you appoint one of your cronies to review the proposal and he recommend a revised proposal that you and your cronies (not the people) are happy about it. Then you present the revised proposal to the parliament again for approval. You know that all your cronies in the parliament will support the revised proposal because the revised proposal is for their own good. The parliament is still dominant by your cronies and the revised proposal will be approved without any question. 


    After the revised salary proposal is done, one of your cronies can say she suffer pay cut by joining politics. She claimed she could earn much more in 'private' sector. Look at what 'private' sector she has worked before joining politics. She has worked for few GLCs before invited to join politics. Are GLCs really 'private' sector? If she is right, those GLCs must have paid her very very high salary. This proves that if you have raised the GLCs chief salary this will actually effect higher salary for you and your cronies. 



    By controlling the corruption at lower levels, foreigners who do not know the details of this system will believe that a pro-business governance system is free of corruption. Is the system really corruption-free?

    Based on the logic, it proves that the current system is very very clever to ‘legalize’ corruption at the highest level. If not, what is it?

    You may look at the logics of GRC, NCMP and NMP. It is not difficult to understand the ultimate motive behind a fake democratic ‘feudal dynasty’ politics in action in a modern world.

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