Porsches in the Parking Lot: Singapore's Govt Pay Spike

So the New York Times finally picked up on the recently announced increase in Singaporean Ministers' salaries. Even in Manhattan where multi- and mega-million dollar paychecks are commonplace, it raised quite a number of eyebrows amongst friends and colleagues in the Big Apple. Undoubtedly it will also create some waves in public administrations around the world.

The whole saga around the pay increase has already been debated ad nauseum within Singapore and sentiment seems overwhelmingly critical. Like most Singaporeans, I agree that there is a good rationale for ensuring that senior administrators are compensated justly and well. This increase however, seems to go well beyond that. It creates a massive govt-people pay disparity at a time when many Singaporeans are facing deflationary pressures on their take-home pay with recent measures resulting in the influx of foreign ‘talent’ at what seems to be entry- and mid-level management positions (in addition, the cost of living in Singapore is only likely to go up with the increase in housing prices and longer term inflation in food/fuel costs, which compresses real take-home discretionary spending power even more).

I was curious about how the new pay hike was reached and found an article in Channel NewsAsia describing the methodology on a relatively general level. To recap, the article stated “the salaries of Singapore's Ministers and administrative officers are benchmarked against the top earners in six professions. These are bankers, lawyers, engineers, accountants, local manufacturers and employees of multi-national corporations”, it further stated, “the Public Service Division said these are some of the occupations that Singapore's top civil servants could have joined.” In addition, “there are two benchmarks that are being used. For the most senior Permanent Secretaries, the top eight earners in six professions are first identified. That makes a group of 48 persons. This group is then sorted out according to their income. After the middle-income earner is picked out, that person's income is multiplied by two-thirds.”

Here is where some red flags are raised.

Firstly, what exactly does “could have joined” mean? That they could have joined those professions when they elected to go into public service years ago? Or does it mean that they could just simply leave their current civil service positions, head to a top bank or law firm or corporation, and not just get a good job there but get the top position in those organizations (since the benchmarks do refer to the top earners)?

If it refers to the former, it smacks of attempting to eat the fruits of a path not taken which in the real world is absurd. We all have stories akin to how someone ‘could have joined’ pre-IPO Google, ‘could have’ gone into the legal profession, ‘could have’ been accepted to a Stanford or Cambridge, ‘could have’ scored the winning goal in a football match, etc. But such perspectives are irrelevant because we live with our decisions in the present, not in retrospective what-if fantasyland.

If the latter, it makes a massive presumption about qualifications and skills. While most people generally regard most senior Singaporean government officials relatively positively, it is difficult to conceptualize a scenario where top-tier private organizations would suddenly make them the head executive, especially if they have little leverage-able, recent or direct experience. I can see them being consultants, Board directors and even one of several/many other senior executives, etc. But the top earner? Which almost always equate to the CEO? That’s probably a massive stretch.

Secondly, the selection of the six professions raises concerns about outliers. Two professions in particular stand out – bankers and lawyers. Without the benefit of the actual survey or sample which was used in the study, I can only comment using anecdotal references. Finance professionals, especially investment bankers, and corporate lawyers have been making record earnings recently in large part because the global and regional economies have been very strong in the last 2-3 years, and there have been plentiful financing, capital markets and merger-related activities. It is no different in Wall Street, London or Asia. As such, compensations have been at record highs running into multi- and mega-millions for professionals in those sectors.

But the key question is, will this continue forever? Abolutely not. Having intimate experience and familiarity with the banking and legal professions, the one thing that is consistent is that job security is never a given. When good times are rolling, people will do extremely, almost scandalously well. When times are bad, the word ‘bloodbath’ gets used endlessly, especially in banking. So referencing those sectors on recent data points which are likely at or near the peak of the current cycle is noteworthy and disturbing. When the down cycle begins, the very same top earners of last year could very well earn only a tiny fraction of what he/she earned at the peak, or even be laid off simply because they are considered high cost individuals. One can rationalize that the good ones are at no risk of being let go, which is a view that is unfortunately untrue even for many talented and hardworking individuals in those sectors. Coincidentally, we may actually now be seeing the start of a new round of rationalizations in these sectors which will only accelerate if the global economy continues to slow or turn south. Will those benchmarks be re-pegged when times are less robust and everyone is presumably earning less via bonuses and stock options?

Even the other professions will likley exhibit volatility in wages if the economy slows, especially if stock options are included in their overall compensation.

The govt's counterpoint may be that the formula supposedly only picks the median amongst the group of top earners in the sample basket. However, an objective critic would argue that using the sample relies on an overall group of outliers to begin with since it picks the absolute top earners in the select professions, Thus, the midpoint of outliers would still be a significant outlier compared to even say, the top overall 10th-20th percentile selection of a wider sample.

In addition, due to the inclusion of current presumably peak earnings associated with high beta professions from the banking and legal sectors, one-third of the sample is already skewed and biased upwards.

Also, why only those select six professions? What about academia? That’s one very logical benchmark profession that most senior officials can ease into relatively seamlessly and could be quite valuable at. Even more fodder for doubters.

The framework also seems inherently flawed because even if it is used on an ongoing basis, it will always pick the top earner in each of those professions which will likely be a different set of individuals from year to year. As such it fails to capture elements of job insecurity, immobility, company-specific risks or competition that are all too prevalent in the real world. Civil positions at the senior level would seem to have materially less job risks than that associated with high paying private sector positions. That in and of itself is a major discrepency. To be fair perhaps that may be reflected in the two-thirds discount factor the formula uses.

All in all, I admittedly may not be precisely correct with the methodology or data set which was utilized. However I remain skeptical about the robustness of the process. One can even posit that the whole formulation looks strikingly like an exercise in reverse engineering to rationalize whatever pay increase that’s desired.

I had previously been very supportive of good pay for officials. The concept was originally quite daring but perfectly reasonable. I had hoped to be convinced with this recent round, but I find myself disappointed at best, and appalled at worst.