Are extravagant ministerial salaries screwing Singaporeans?

What accounts for the tendency of Singapore’s ministers of the ruling People’s Action Party to thumb their noses at ordinary Singaporean citizens?

Here are some examples of such quotes (thanks TOC):

I don’t want whining Singapore boys. They are not mature even though they have done national service and are over 22 years old when they take up undergraduate studies.
PHILIP YEO, EX-CHAIRMAN, A-STAR (Straits Times, 2005)

[A] well-educated university graduate who works for a multinational company should not be bemoaning about the Government and get on with the challenges in life.
MP FOR ANG MO KIO GRC, WEE SIEW KIM (Straits Times, 2005)

Singaporeans are champion grumblers.
MM LEE KUAN YEW, (National Geographic, Jan 2010)

The problem of choosy workers is still with us.
THEN-MINISTER OF STATE FOR MANPOWER, NG ENG HEN (MOM, 2003)

Why is this behaviour amongst the ruling party leaders becoming more widespread? Why are Singaporeans forever told to work more efficiently for lower pay? For a long time most people, chiefly netizens, have fingered high ministerial salaries (the highest in the world)  and a sheltered life with little threat of political opposition, coupled with extremely low tolerance for criticism (“thin-skinned”) necessary for a healthy democracy to function as probable causes. A recent paper highlighted by Harvard Business Review appears to confirm such a belief.

In the study, the authors explored the link between CEO compensation and mistreatment of employees, whilst controlling and testing for other variables such as firm size, age, risk (as measured by the variation in the firm’s stock prices) and performance (gauged by the return on assets or ROA). What were their findings? Not only did they show that CEO pay was statistically significantly correlated with worsening employee treatment, it was also found that the firm being in existence for a longer period of time, and ROA also tested positive for correlation:

As can be seen from the table, firm age and ROA had a positive, significant influence on meanness whereas firm size had a negative influence. Of greatest importance, the hypothesized main effect of CEO compensation was significant (B= .14, t = 2.13, p < .05). Our finding suggests that the higher the level of CEO compensation, the meaner the behavior of the organization toward lower level participants.

How does this apply to what we observe in Singapore? Firstly it explains very well why PAP ministers have been growing more arrogant towards the same people whom is supposed to hold them accountable in elections. Since 1994, ministerial salaries have been pegged to the top earners in Singapore, which have been relentlessly increasing even as the bottom quintile of wage earners fell off. Together with firm age, which we may associate with the long period since 1959 the PAP has been in power, and firm performance with the Singapore’s year-on-year GDP growth so often touted in the media and one almost has a perfect analogue in Singapore to what he/she finds in the study.

A literature review conducted by the authors also found that CEO wealth often manifested itself as power:

The literature on executive compensation has also identified CEO pay as being a key indicator of CEO power. Simon (1957) was one of the early scholars to propose that pay differences are set by management as a way of symbolically distinguishing between different ranks within the organization. The higher the pay of the employee, the higher is his rank, and more is the power wielded by him. Similarly, Lazear and Rosen (1981) put forth the notion that CEO compensation can be viewed as the prize in a tournament competition, with the amount of the prize signifying the rank, and therefore, power of the winner.

Finkelstein (1992) and Hambrick and D’Aveni (1992) have also asserted that compensation is an important metric of the formal power wielded by CEOs. According to the “managerial power” perspective prevalent in the domain of corporate governance, the power wielded by CEOs as a consequence of the wealth accrued to them causes them to be in a better position subsequently to negotiate even higher pay rises, leading to a never ending pay-power cycle (Bebchuk & Fried, 2004).

and that such perception of power, if it trickles down (pardon the pun) to the workers (or peasant, in Singapore) often self-reinforces the very same perception as it becomes quasi-institutionalised:

What the CEO is paid is often publicly available information. When CEOs earn, for example, 400 times the amount earned by rank and file workers, these workers’ perceptions of the power of the CEO are likely affected. Thus, we suggest that increasing compensation not only increases CEOs’ perception of how powerful they are but also affects the perceptions of the workers they manage. Subsequently, when workers witness CEOs behaving as if they are powerful, the workers react as if this is indeed the case.
…
Workers’ response to the CEO’s behavior perpetuates the CEO’s belief in his or her increased power. Previous research indicates that social beliefs can act in a self-fulfilling manner, affecting responses to individuals and thereby encouraging these individuals to behave in ways that confirm attitudes about them. Thus, when workers acknowledge the dominance of CEOs, CEOs’ perceptions that they are all-powerful are strengthened. Such power may become institutionalized over time such that in due course organizational members may become even more accepting of the power wielded by executives, and in turn, this may feed into the executives’ perception of their legitimate power.

From the above it may be deduced that in other to not perpetuate this self-reinforcing cycle in Singapore, citizens should not be afraid to challenge, debate or criticise public policy decisions. The paper also observed that such manifestations of power have often led to CEO’s abusing them (proof that power corrupts) to ensure they never get fired when they under-perform:

Financial economists have also commented on how executive pay translates into power that results in undesirable CEO practices such as using managerial discretion to benefit themselves personally, engaging in empire building (Jensen, 1986; Williamson, 1964), and entrenching themselves into their positions so that it is difficult to fire them when they underperform.

Lest anyone needs reminders, it is precisely this behaviour Singapore citizens have witnessed when monumental screw-ups such as their country’s massive sovereign wealth fund losses in the financial debacle of the subprime crisis, the MRT depot break-in, widespread flooding of the past few weeks blamed on choked drains (curiously, no picture of the choked culvert supposedly responsible for Orchard River was ever posted) go unpunished, and key personnel in all these scenarios are seemingly untouched and unblemished by even the slightest speck of responsibility one would normally expect of a highly paid public servant.

In addition to the above, the authors also conducted a psychological study whereby participants in a controlled setting appointed as either “managers” or “employees” in a game where much the same effect was observed:

More importantly, as predicted, higher relative compensation of manager resulted in greater perceptions of power (M = 11.47, SD = .35) compared to low relative compensation of manager (M = 9.52, SD = .32).
…
As reported in the table, in Step (i), we found the hypothesized direct effect of relative compensation of manager on meanness (Exp[b] = 3.11, p < .05) such that higher relative compensation of manager lead to more meanness (see Figure 1). On introducing the mediator in Step (ii), the direct effect of relative compensation of manager became considerably smaller and insignificant (Exp[b] = 1.33, p = .67), whereas indirect effect of perceived power was significant (Exp[b] = 1.58, p < .05), thereby suggesting the perceived power fully mediated the relationship between relative compensation of manager and meanness.

The results from Study 2 provide support for our argument that increasing relative compensation of manager results in an increase in the perception of power which leads to those in positions of authority behaving meanly.

What are the implications of such findings? The authors go on to suggest a few suggestions for improvement, which I personally find, are relevant to Singapore.

The literature on executive compensation has identified that the relationship between the CEO of a company and its board of directors tends to be somewhat symbiotic, with the board participating in the CEO selection and wage determination process and the CEO subsequently exerting control over not only whether directors get re-nominated to the board but also over perks received by board members. Making matters more complicated, board members and CEOs often belong to the same social network, with CEOs sometimes sitting in on the boards of other organizations along with board members of their own companies. Such a level of interdependence naturally raises doubts about the board of directors’ ability to assess and monitor objectively CEOs’ performance and consequently estimate appropriate levels of their pay.

This is precisely the exact situation which we find in Singapore’s political system, where the Parliament (overwhelmingly dominated by the ruling party) which oversees and approves of ministerial salary hikes whilst the Cabinet ministers, particularly those in the Prime Minister’s inner circle comprising of his office, the senior ministers and his office often handpick, from time to time, selected MPs in the parliament to elevate them to the various ministerial offices.  This suggests a strong conflict of interest similar to what we find in the corporate world of executive board of directors their CEOs.

Unsurprisingly, the study’s authors also suggested that excessive CEO compensation could also be curbed by increased disclosure and transparency of CEO compensation to shareholders, such as how CEO salaries are determined:

To encourage shareholder participation in determining CEO wages, the Securities and Exchange Commission (SEC) has recommended that not only should companies disclose the amount of compensation paid to executives, they should also explain to shareholders precisely how the board of directors has arrived at a specific figure for CEO compensation

as well as giving shareholders the democratic right to determine the adequate amount of CEO pay:

In addition to improving the clarity of information provided to shareholders, legislature such as the Shareholder Vote on Executive Compensation Act suggests that shareholders should also be given the right to vote on the amount of compensation given to executives.

Other suggestions include capping the top limits of executive pay (a maximum wage in proportion to that of the lowest paid employee), donating excess pay to charity, strengthening labour rights and power of rank and file employees and lastly focusing the harsh media spotlight on extravagant CEO salaries to discourage them.  It is interesting to note that each and every one of these suggestions have been at one time or another proposed by various netizens, only to be ignored and rebuffed by those in power.

In closing, I’d like to say that I personally find it troubling that so much of a paper which was  written primarily for fat cat corporate America is directly applicable to the pay structure of Singapore ministers is a sobering reminder of the current state of Singapore’s political system.