Reviewing ministerial salaries: Seven lessons from the private sector

SINGAPORE: 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. (Incidentally, when I showed someone the draft of this commentary, I was alerted to a 2007 speech by MP Denise Phua in which she made some similar points. I am glad there was such an alternative voice in Parliament and wish that her views were taken more seriously then.)

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.

If we are not prepared to adopt similarly robust processes and practices for setting ministerial pay, then perhaps we should just follow how other countries determine pay for their government officials.

We can then rely more on robust selection processes and strong enforcement of laws to take to task ministers who are corruptible, in order to ensure that we get ethical and competent government leaders.

However, even if we decide to "de—privatise" ministerial pay, I believe there are certain merits in adopting some of the good practices in the private sector approach — such as having a more independent mechanism for setting ministerial pay, having better measures of ministerial performance, creating mechanisms to encourage ministers to focus on longer—term consequences of decisions, and greater transparency in ministerial pay.

This may minimise the risk of receiving an "unexpected" performance appraisal from the electorate every four years. —

- TODAY , Mak Yuen Teen is an associate professor at NUS Business School.