Reviewing ministerial salaries: Seven lessons from the
private sector
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.
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.
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.
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 ....
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.
Some good ideas there, and all worth considering.
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?
http://mrwangsaysso.blogspot.com/2011/05/possible-formulae-for-determining.html
