Monday, December 26, 2011
TR EMERITUS
The Voice of Singaporeans for Singapore
Pay for Performance – Really?
December 26th, 2011 | 
Author: 
Arguably, the SMRT crisis management fiasco and ministerial pay are the hottest issues hogging the cyberspace limelight now. The former is recent and the latter enduring since pre-election and still is a burning question. Understandably, some emotive content, even debatable of politically flavored of correctness or otherwise in blogosphere, is unavoidable. But let us look at the light and substance instead of the heat of public discourse here. In the public mind is how much ministers should be paid i.e. by definition of that stance, how much should the current humongous pay be cut to reflect public expectations of realistic compensation equity and contribution to society.Interesting that the most learned Associate Professor Eugene Tan recently spoke of the same subject matter – quoted of his public comments – that the cut be too deep could “ disincentivise private sector talent to enter politics’ and that a too deep a cut will be ‘admitting that ministers have been grossly overpaid for 15 years’. This writer begs to disagree with the most distinguished associate professor’s great thoughts, for varied compelling reasons. TRE readers can form their own minds.
The first fault, to my mind, is the “benchmarking” itself of locking ministerial pay to private sector comparison of top earners. The presumptive thought is – attracting best of talent outside into the political arena. Is the hotbed of political talent incubated only in private sector – the same logic of support found in the most learned Associate Professor Eugene Tan’s postulate? Did we saw that in the last election or the election in 2006 of political talent influx from private sector instead of public sector influx into our political arena? I will let the known facts speak for itself of reality and fiction without elaborating of the famously fearsome “cracked” airborne brigade parachute drops into GRC fortified strongholds. I am more than a little disappointed of that expected outcome in 2011 with some notable exceptions in the opposition camp. Maybe there will still be dissenting voice on this report card of actuality transpired.
But what inherently “wrong” with benchmarking to private sector’s best earners – even if it is arguably irrelevant of talent attraction from private sector into the political tiger cages? There are more than a few.
First, I recall and agree with the former MM Lee’s assertion that politicians are born, not trained. And I suspect the skills-sets are different too. A technocrat may be an ace in his/her chosen field in private enterprise but a fumbling fool on the political stage. The late Kim Jong Il was a top dog political animal and maestro on the political stage, sinking the “Cheonan” and surviving the aftermath risks of US-South Korean retaliation. His only technocratic skills, if any, are trouble-making, certainly not of economy or managing business in the private sector. There is no evidence I see of any top politicians becoming successful entrepreneurs after leaving politics and certainly one case of very successful businessman turned monumentally failed politician – Thaksin Shinawatra. There is a void in that assumed businessman-politician success “connect” that needs elaboration and substantiation of fact. Neither Dr. Henry Kissinger nor Robert J. Hawke made waves as “business consultants” servicing global businesses for all their acclaimed global reach and assessed stature. So it mystifies me of the connect between ministerial and private sector pay linkage when they are, to my knowledge and belief, are of oceanic divide of skill-set relevance.
Take one step further, the linkage of ministerial pay to private sector earnings fell short of supportable equity parallel. Top earners in private sector rotate but the political emperors’ thrones are not equally flexibly rotational. A top stockbroker in 2010 may not make it to the list of top 30 earners next year or forever but minister is there for a 5 year term or longer. Ministers have no bankruptcy risks in paid secured employment but stockbroker risks bankruptcy if GFC erupts or his business decision/s went awry. So benchmarking ministerial pay to rotating top private sectors earnings is akin to betting on outcomes in the race course after the winners have been announced. And each benchmarking year, the top horse and jockey get paid higher and higher even if the economy swing into deep recession. Ministerial pay is therefore, slapped on a secular rising trajectory while their benchmark statistical counterpart’s reality is one of roller-coaster ride to potential financial ruin. There is no equity in compensation – performing or otherwise of the ministers.
On this score, I believe public distaste for humongous ministerial pay is amply justified and I shall humbly disagreed with the most learned thought of Associate Professor Eugene Tan, If he is selected to be amongst the next batch of nominated Member of Parliament, I certainly hope and be grateful if he would vigorously raise these arguments I have here for his informed consideration in parliamentary sittings.
I also disagree with this most learned Associate Professor’s line of reasoning that too deep a cut will be “admitting that ministers have been grossly overpaid for 15 years’. My disagreement is partly philosophical and mostly of rational economic logic. There is nothing sanctified about historical pay and nothing is ordained in divine of a 15-years look back of presumed embarrassment – if indeed it is some kind of embarrassment of “grossly overpaid” yet indeterminate and unknown to public. So his reference to 15 years is mind-boggling to me. If it was in the mind thoughts of this very learned Associate Professor, then that is the exact compelling reason for the deepest cut now.
Otherwise, we are trapped in the artificially uplifted base from which ministerial pay in the future will rise from this inflated benchmark. In effect, it will end up as a perpetuation of past inequities or incorrectness of gross overpaid – even if such was unintended initially. The political philosophy of that stance is unreasonable of public support – you can’t correct an error by compounding that error! You must, by its continuation, aggravate it by definition. Please allow me to share some economic logic with you (if you are sharing thoughts with me on this thread) – the most learned Associate Professor, with this economic logic of my analogy and see if you still disagree with me.
A stockbroker bought shares in a particular stock in a falling market, each time with the same quantity of capital outlay, starting with $1 to 80c to 60c to 40c and finally at 20c. Well, his theoretical average price paid is 50c, right? But look what happened. The stock fell 80% in that bear market to 20c, right? But from the lower base of 20c to climb back to his average costs of 50c per share, it has to rise by 150% to breakeven. The “recovery” path is nearly twice as burdensome of efforts and in a weak market, it is excruciatingly painful of wait, hope and tough business turnaround to move back to your breakeven point. THE STUPIDITY OF AVERAGING DOWN ACERAGES THE UNIT COSTS PRICE PER SHARE BUT ESCALATING YOUR TOTAL LOSSES.
So on pure economic logic, it is wiser to cut losses (when it is ascertained to be a futile cause of prior failure or prior “error” decision of any nature) than to tough it out compounding the wrongs, And if you really fervently believe in private sector benchmarking of ministerial pay, then the same surgical logic must apply to all critical decision of economic logic. Or shouldn’t that be the case of equally compelling economic logic – forget the politics?
I actually disagree with the notion of pay incentivizing performance linkage – most definitely in the political arena. And even in the private sector, where pay is attempted of positive reinforcement to encourage performance, there is such a thing as bonus payout as a “reward” becomes a bonus payback as a financial “penalty” where delayed outcome did not matched the agreed benchmark criteria. There is the negative feedback loop to threaten “underperformance” – justifiably of changed economic circumstances or not. I believe this is in practice at CapitaLand Limited – a GLC which is 46% owned by Temasek Holdings (Private) Limited. One can see the “tightness” of control and linkage between pay-performance connect and “performance” of CEO’s risks sharing. It is hard to fathom why such “negative” feedback loop be deemed appropriate to have been applied in a GLC but not to ministerial pay at the very top.
So when and if ministerial pay is presumably judged to be grossly over-paid for the past 15 years, it is harder to publicly justified that no deep cut henceforth can be justified – forget the payback of the past undue “over-payment”. The diabolical irony-of-head-I-win and tail-you-lose humor won’t be lost on public mind. It will send the message that nothing has changed. It is very hard, after a point of cognitive dissonance, to keep up with the APPEARANCE of rationality when rationality of argument is discredited.
When one look at the headline read of “pay for performance” with the view to seduce quality inflow and performance, the three words has “pay” in front and performance the ex-post outcome expected or hoped for after the fact of pay. What happened when performance failed? There is no prior payout penalized as pay back for “underperformance. That is to say, there is no risk sharing. The incumbent keeps his or her humongous pay and bonuses to boot. You can’t have sharing of a private sector pay incentive minus the cancellation of pay disincentive risks for adverse performance. Pay for performance DOES NOT mean pay for no performance.
If you reverse the formulae, then it is “performance for pay.” That means performance must come first before pay adjusted for that performance and by that definition, ministerial pay should NOT be uniformly the same across the cabinet but differential in quantum and differential as to the timing of reward of pay in fair compensation to reflect performance. But is this the case now? You can’t expect to grow experience, skills-set and performance proof on a young head sitting on an old shoulder – metaphorically speaking. The whole idea of humongous ministerial pay uniformly rewarded across cabinet positions, is absurd for the last 15 years up till now, in questionable benchmarking to private sector’s pay logic. Young heads in private sector don’t earn as much for same shallowness of depth and narrowness of experience. It is simply benchmarking to highest range of private sector pay regardless of ministerial performance or untested capacity for performance. Nothing less than a deep cut is appropriate to reflect differential experience, skills set, tested or untested of performance measure if one subscribe to the notion of pay for performance quality expected of quality incumbent. That quality needs to be substantiated by proof, not mere public utterance of belief that it really exist.
Out in the real commercial world, there are lots of academically-inclined young aces that simply won’t make the cut outside the skeletal-supported framework of the corporate world and if we bring them into the political arena seduced by the greed chase for pay for no performance accountability but political loyalty, this country will be simply courting disaster at a faster suicidal rate of decaying decline.
Of course, someone could come back to argue that ministerial performance is cabinet consolidated – collective performance measured to KPIs of GDP statistics. That, to me, has questionable merit of support. It then degrades ministerial pay’s “presumed correlation” to performance to one that is solely by reason of membership has its privileges. Has ministerial pay gone down in the last 5 years when this is happening?
Forget the lower strata of our society who missed out of economic advancement on this KPIs measure of ministerial performance, the middle class also got “transported” to irrelevance of benefiting from national GDP gains. You are then compelled to ask – why is this strange dichotomy?
In a crude sense, GDP growth measure is the sum aggregate of economic value added in a defined time interval. That includes wages/salaries, dividends for shareholders, interests on borrowings, rents paid to landlords, taxes paid to government, undistributed earnings, depreciation, amortization retained in the business etc. See page 101 of CapitaLand 2010 annual reports for an example.
That means that if wages does not move up in the last 5 years, but GDP rises, businesses and government taxes are doing very well. It is very easy for any Government to manage an economy to enrich business, taxes and claim performance bonuses for KPIs on GDP statistic – just hold down wages by means for foreign influx. So where is the true hardship performance for humongous pay escalations in the last 5 years? I can’t see anything of merit of that KPIs of GDP measure of “ministerial performance” measure. It is a distorted measure of ministerial achievements at best and inequitable to the working class in particular.
And last but not least, entry-level psychology students would be familiar with the astounding finding of classical conditioning. I am referring to the Nobel prize-winning work of Soviet physiologist; Ivan Pavlov’s experimentation with dog’s salivating to external stimulus. I believe that in general there is parallel relevance to understanding of human behavior to external stimuli such as Pavlov’s dogs to food (financial rewards in managerial performance analogy). Pavlov discovered that his dogs “would often begin salivating in the absence of food and smell……..were responding to the sight of the research assistants’ white lab coats, which the animals had come to associate with the presentation of food.”
Extrapolating the same classical conditioning, one could argue that the pay performance linkage is tenuous at best and at worst dubious. After a while, the subject is motivated to pay instead of motivated to performance and every pay day, he or she would be looking at his/her bank account to see how many incremental digits have been added to his/her last banking account balance and of course, his monthly CPF statement, dancing with joy!
Anyone else any other thoughts?
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Anonymous
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Its time he takes a stand so we know where is coming from. But we know where he plans to go to!.
thanx.
I lost job during the financial crisis to foreigners.
During the crisis most companies stopped IT projects.
Those that hired preferred foreigners to cut cost.
I suffered for years.
I worked as hard, in fact, harder than foreigners.
Now, i work as hard as I did.
But beyond that, additional salary given will not bring better performance.
December 26, 2011 at 1:11 pm
If your performance is better than a pinoy,you work harder but in the end,the HR’s pinoy refused to aknowledged and so you are paid less, where pinoys in the same team work less and get paid more.your family suffers, eats less because of your low salary and yes, you’re an idiot who is stupid and ignorant to be the other 60% but realized a bit too late!
Changes? some cosmetic changes
Real Changes wait for 2 events.
First, the aged one moves to the next residence with occupants like Kim jong Il,Marcos,Suharto,Gaddafi.
Second, General elections slated 40 to 52 months from now