Furry Brown Dog

Dedicated to the memory of my canine friend…

Are extravagant ministerial salaries screwing Singaporeans?

with 5 comments

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.

Written by defennder

July 8, 2010 at 5:00 PM

5 Responses

Subscribe to comments with RSS.

  1. […] Ministars Get Rich or Die Tryin – Furry Brown Dog: Are extravagant ministerial salaries screwing Singaporeans? […]

  2. Credit to your article linking such bad behaviour shown with what we have seen in corporate America. Actually, it is not so surprising if we accept the view that Singapore is run as “Singapore Inc.” and that we have adopted and ape wholesale the Western capitalist structure and practices. Not just in the commercial sectors, but more tellingly in the governmental arena.

    I am sure your hypotheses if given a robust academic approach would be proven significant. Alas, for obvious reasons, such endeavour would never see the light of day in Singapore.

    Let me take the liberty of speculating what are some of the possible consequences of such extravagant ministerial salaries on Singapore.

    1. More frequent, insulting and worthless utterances/excuses/explanations/statements (such as “cheaper, faster and better”) would be recorded. If you have read a lot recently, expect more.

    2. The extravagant life and times of the elite would be an increasing feature in the local press. Perhaps to neutralize what is considered extravagance. More likely due to self-censorship, focus is targetted at the fallen directly.

    3. Other countries would want to emulate Singapore’s high ministerial salary to some extent. We can count out USA, Europe for now – they have a budget deficit issue. My bet is on China. Myammar anyone?

    4. The structure of exorbitant salaries have also spread to other organizations. Most visible of late are the charitable and religious organizations. What about non-listed GLCs, TLCs, statutory boards, etc.?

    5. Expect to see higher salaries and perks being enjoyed by the top echelons in local companies. This could be from a double feedback loop from the ministerial salaries being pegged to private sector pays.

    6. Ministerial salary would move up to become one of the top election issues. This is a no-brainer for the opposition.

    7. The elite and their family members must be growing more nervously by the day at this issue. Why? When transparency and accountability fail, whistle-blowing is still a good option, however informal. And the internet is ubiquitous.

    BABO

    BABO

    July 9, 2010 at 8:24 PM

  3. BABO

    Yes, it’s somewhat unfortunate that Singapore’s ministers have decided to recline and boast of their predecessors’ deeds and sacrifices and how they’ve deserved every penny of their extravagant million dollar salary. A little like a CEO which boasts of his tenure being responsible for his company’s high earnings growth whilst at the same time cutting costs by outsourcing labour and slashing worker benefits, effectively ignoring the sacrifices of the workers.

    What struck me most about the current generation of Singapore’s leaders and that of the first generation was that the latter made numerous personal sacrifices in order to transform Singapore into the modern nation it is today. The pioneer leaders such as former Finance Minister Goh Keng Swee were famous for his personal thrift and frugality:

    Ten years after Dr Goh’s departure, Lee substantially raised cabinet salaries by pegging them to the top private sector here.

    These salaries skyrocketed further since 1994.

    Some observers believe that it was unlikely Dr Goh, with his reputation for thrift, would have gone along with such a scheme.

    An old family friend recounted how, when using the tissue paper in the ward, Dr Goh (who came from a wealthy family) would tear each sheet in half, saving the other for future use.

    If his wife used an entire sheet, he would chide her saying, “Its taxpayers’ money.”

    Or how about Lim Kim San, “Mr HDB”, whose tenure at HDB saw 10,000 units built in its first year, an unprecedented number. Lim was also known to be personally involved in on-site inspections of building projects of his time and was known to have personally opposed excessive ministerial salaries:

    It was not just that he got residential units built at an unprecedented rate, but his on-the-job manner broke the mould for Singapore ministers. Recalls Cheong Yip Seng, editor-in-chief of Singapore’s flagship the Straits Times newspaper: “He would be out there at the construction sites, checking everything, talking to the workers and the supervisors. Asking why it was not possible to do it this way or that way? Are you using the right materials? Very detailed and very hands-on.” Once Lim noticed a serious problem. “When I was driving to my office, I passed a block that was being built,” he says. “It looked as if it was slanting, so I called the chief architect and they did a plumb line. It was slanting. So I told them to demolish it.” Just like that. And down it came. That was the Lim style. “No mucking about,” he says.

    Not that he and Prime Minister Lee Kuan Yew did not have their differences. Some bureaucrats confide that Lim, along with certain other ministers, sometimes felt that Lee bagged too much kudos for himself -and displayed too much swagger -for being No. 1 in the party and government. On one occasion, when Lee discussed an issue with the top official in Lim’s ministry without informing him, Lim rang the PM and ticked him off. He told Lee: “If you want to deal with my ministry through other people, then you don’t need me as minister. But if you trust me to be in charge, then leave me be.” Lee got the message.

    His comments also continue to ruffle feathers in politics, where he is unafraid to buck the PAP line. For instance, he disagrees with the exceedingly high salaries paid to Singapore ministers -a policy fervently defended by his chum Lee. “It’s too much,” Lim says, shaking his head. And he is critical of the composition of the cabinet, openly lamenting that in today’s Singapore there is no way a savvy, practical -but degree-less -man like himself could ever be chosen as a party candidate, let alone become a minister. “That’s why we will never get another cabinet like the one Lee had,” he says. “We had various qualifications and backgrounds. That’s what makes a good cabinet, not just 1st class degrees.”

    In many ways, Singapore doesn’t have any more ministers like its first generation leaders. Not only did they lead by example, you never hear of complaints of threatening to leave because their million dollar salaries were too low in comparison with the private sector. How times and people have changed! And not necessarily for the better.

    By the way you do write pretty well for someone presumably without a blog. Do consider starting one to air your opinions so we may all learn from each other. I was encouraged to start one when I ran into blog owners whom would not approve of comments when they profoundly disagreed with them.

    defennder

    July 14, 2010 at 11:43 PM

  4. Hi Defennder,

    I am the owner of the blog http://www.transitioning.org.

    I am asking for permission to post this article on my blog.

    Thanks and keep up the good writing.

    Gilbert

    Gilbert Goh

    October 29, 2010 at 6:40 AM

  5. Gilbert

    Hi thanks for reposting this post of mine. It certainly helps that it receives wider readership. You don’t have to ask for permission to reproduce any content here in whole or in part.

    I just updated the page on About this blog to clarify this. Again thanks for reposting this. Keep up the good work with your website Gilbert, I am a big fan of your website because it hosts many letters from actual unemployed people. Sure helps the rest of us in learning about the first hand pain of being unemployed or made redundant in Singapore. All too often rosy GDP figures obscure the truth of the pain and suffering undergone by Singaporean workers when they are retrenched.

    Many thanks and best regards,
    Defennder

    defennder

    November 4, 2010 at 12:19 AM


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: