Wage Issues and Human Resources in Singapore

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Wage Issues and HumanResources in SingaporeRosalind Chew a & Soon Beng Chew ba Nanyang Technological University , Singaporeb Nanyang Technological University , SingaporePublished online: 26 Apr 2011.

To cite this article: Rosalind Chew & Soon Beng Chew (2005) Wage Issues and HumanResources in Singapore, Journal of Comparative Asian Development, 4:1, 77-103, DOI:10.1080/15339114.2005.9678411

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Wage Issues and Human Resources in Singapore

Rosalind CHEW Nanyang Technological University, Singapore

Soon Beng CHEW Nanyang Technological University, Singapore

Abstract

One of the most important HR issues in Singapore today concerns the transformation of the wage system from the seniority-based wage system to the flexible wage system (FWS) based on annual bonuses in the first instance and then on the monthly variable component (MVC), which is a special case of the FWS. This paper examines the complexities involved in the transformation of the wage system which is intertwined with Singapore's social security scheme, namely the Central Provident Fund (CPF) and the tripartite National Wages Council (NWC). Both macro data and the views of employers and employees at the plant level have been included to examine the success and difficulties in changing the wage system.

The main findings are encouraging. The improvement of communication and trust is vital for the success of the FWS. These two factors are crucial and interdependent on each other. Besides a clear understanding of the rationale for the FWS, employees and management must trust one another to work in cooperation with each other to make the move into the flexible wage system a relatively painless and problem-free process. All the necessary steps for the implementation of the FWS have been laid out by the NWC. What is required now is the reorientation of the mindset and attitudes of employees and employers to facilitate full acceptance of the FWS. To achieve this, the tripartite players should continue to hold meetings and seminars to educate employers and employees on the need for the FWS and its benefits to them in the long-run. In addition, tripartite

The Journal of Comparative Asian Development, Vol. 4, No. I (Spring 2005) 77

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78 The Journal of Comparative Asian Development

teams that look into industrial relations and employment-related issues can be formed to build trust and enhance communication of such issues. With the support of government leaders, union officials and employers, issues that crop up during the implementation can be quickly resolved through open discussions to arrive at a win-win solution for employees and employers.

All employees must be briefed clearly on the principles of the FWS to ensure that their interests are aligned for the smooth implementation of the FWS. The provision of incentives to encourage the unionization of employees will also increase the adoption of the FWS as unionized employees are more willing to accept the FWS. They know that their unions are negotiating for them and that their employers would not make pay cuts without the unions' consent.

A study of one industry demonstrates that the flexible wage system has been implemented successfully. This is possible with proper cooperation among the tripartite parties and appropriate efforts made to educate employees. With better employee and employer perception of the FWS and the implementation issues involved, measures can be taken to enhance the adoption rate of the FWS by firms in Singapore. These include strengthening the roles of the tripartite parties, emphasis on improvement in information-sharing and the building of trust and effective communication channels. According to union officials, most of the firms in the industry have shared similar experiences. As Singapore is a small and open economy, there is a need to create an effective way to reduce labor costs so as to stabilize employment. Hence, it is imperative that both its workforce and employers be willing to embrace the principles of the FWS and push toward the goal of full FWS implementation.

Overview

A study of the extensive literature that exists on the flexible wage system (FWS) reveals that some employers may adopt the FWS to discourage unionization (Lindop 1989), and some unions in the USA have negotiated for the FWS in exchange for wage concessions in distressed firms, so that workers would benefit in subsequent recovery (Bell and Neumark, 1993). Kruse (1996) highlights the following factors for adopting the FWS: to

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Wage Issues and Human Resources in Singapore 79

encourage productivity, to cope with variation in business demand, to discourage unionization, and for income tax reasons. His empirical findings indicate that no group of factors dominates the decision to adopt the FWS. Robinson (2005) finds a positive linkage between the FWS and significant investment in human capital.

Brown (2005) finds that the institutional environment is an important factor affecting the implementation of the wage system. The environment in the US allows a firm to adopt the FWS, which is more efficient. But in the case of Germany, the wage agreements and works councils restrict the firm from adopting the FWS.

Lawson, R.A. and Bierhanzl (2004) compiled a labor market index for more than 100 countries on the basis of the income tax rate, minimum wage law, flexibility in hiring and firing practices, the proportion of workers affected by centralized collective agreements and the usage of unemployment benefits. It shows that, among the OCED countries, the US has the most flexible labor market despite the fact that the US has a high minimum wage. On the other hand, Demark has the most flexible hiring and firing practices but that advantage is overwhelmed by her high tax rate and generous unemployment benefits. Among Hong Kong, Taiwan and Southeast Asian countries, Hong Kong has the most flexible labor market, followed closely by Singapore. However, Brown might not have realized that Singapore does not have an unemployment benefits scheme. Instead, Singapore has the Central Provident Fund (CPF), which has been used to reduce labor costs to protect employment. As will be obvious to the reader, the implementation of the FWS in Singapore is to reduce the need to use the CPF to protect employment.

The impetus to promote the FWS comes from the Singapore government and the labor movement, represented by the National Trades Union Congress (NTUC). Hence, it differs from the experience of other countries in which the FWS is a result of a spontaneous decision at the firm level. In the case of Singapore, the labor market aims to be totally flexible in terms of wage costs in order to minimize variations in employment. This can be made possible because the NTUC is a macro- focused union which works with the government to achieve full employment.' The present paper discusses the factors affecting the

1 Chew and Chew (1995) make a distinction between micro-focused unions and macro-focused unions, with the latter emphasizing full employment and competitiveness for the economy. They also examine the micro-foundations of the macro-focused labour movement, which

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80 The Jounull of Comparative Asian Development

implementation of the FWS in Singapore. The wage system in Singapore has evolved from the seniority-based wage system to different forms of flexible wage system and is, to a certain extent, contingent on the Central Provident Fund (CPF) and the tripartite National Wages Council (NWC).

NTUC

The NTUC has evolved into a macro-focused trade union over the years. This has been possible because of the symbiotic relationship that exists between the NTUC and the ruling party (the People's Action Party, known as the PAP) that has governed Singapore since 1959. The secretary-general of the NTUC is also a key member in the PAP as well as a member of the Singapore Cabinet. Hence, the labor movement in Singapore, which is dominated by the NTUC, has always strongly supported the Singapore government's objectives of nation building and economic development.

As a macro-focused trade union, NTUC promotes employment and training for all workers in Singapore, not just for union membem2 This strategy of emphasizing macro objectives with no special favor for trade union members, is, as expected, well supported by the government and the employers. NTUC has also openly supported the government policy of attracting foreign talent and foreign workers as this policy will entice more foreign investment to flow into Singapore and consequently generate a good number of jobs.

As Singapore is a small and open economy, her GDP and labor demand fluctuate in tandem with the state of the world economy. During the recessions that affected Singapore in 1985 and 1998, when Singapore registered negative GDP growth rates, the government had, with the support of the NTUC, used labor cost reductions as an effective solution to prevent retrenchment.

Thus, the industrial relations system in Singapore is employment- driven because the unions are macro-focused (Chew and Chew 1995). This means that the labor market bears the burden of adjustment in an

calls for certain conditions or arrangements conducive to, and the instruments needed for, the establishment and survival of macro-focused unions.

2 This presents a free rider problem. See Chew and Chew (1998) for NTUC's strategy with regard to this problem

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Wage Issues and Human Resources in Singapore 8 1

economic downturn. The main form of labor market adjustment is now the FWS.

Central Provident Fund as Singapore's Social Security System

There is no unemployment benefits scheme in Singapore. Singapore's social security scheme is based on employment. In other words, when a person is unemployed, he has to find a job or use his savings to support himself or be at the mercy of his relatives or friends. Singapore's social security scheme is the Central Provident Fund scheme which was introduced by the British in 1955. Under this scheme, both employer and workers contribute each month a certain percentage (initially 5%) of the monthly wages of the worker toward the worker's CPF account. This raises the wage cost of employing workers by the amount of the employer's contribution. Over the years, both employer and employee CPF contribution rates were raised to 25% in 1985 due to rapid economic growth.

It should be noted that the CPF scheme is a fully funded compulsory saving scheme. Workers in Singapore can only withdraw their CPF balance at the age of 55. However, workers can use their CPF balance to service their housing mortgage. Not surprisingly, any change in the employer's CPF contribution rate would have a significant impact on property prices. As will be discussed later, the CPF scheme and the seniority-based wage system, which is discussed next, are inseparable.

The Seniority-based Wage System

The seniority-based wage system has been the dominant wage system in Singapore since the 1 9 5 0 ~ ~ It is a system wherein the wage of a worker is linked to his length of service with the company. If the company does well, the worker may get a bonus of about one month's pay. This wage system was also adopted by the government for some civil servank4

3 For a further discussion on HR issues in Singapore, see Thong, 1996. 4 The civil service also implemented the pension system for school and senior government

officials according to which an employee receives a monthly income of about two-thirds of his last-drawn pay upon retiring after working for 30 years with the government.

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If we impose the condition of profit maximization, the entire lifetime earnings of a worker must equal hisher total value of marginal product. However; in reality the two curves do not coincide, as illustrated in Figure 1, in which the curve AB represents the yearly earnings of a typical worker, while the curve CD represents the contribution to the company of this worker. Rather, it is more likely that the wages of young workers are lower than their value of marginal product of labor in the early years of employment, and the reverse is true when they approach the age of retirement. Hence, a worker invests in the firm and hopes that his investment will bear fruit toward his retirement.

Figure 1 The Seniority-Based Wage System

Employers are happy with this system for the following reasons: when a young worker leaves the firm, the firm does not lose out, as it has gained more in productivity than it has paid in wages. Nor will it lose out when the worker retires at the stipulated retirement age as the area under the two respective curves is the same under profit maximization.

The seniority-based wage system served Singapore well from the 1960s to the mid-1980s. However, in late 1985, there was a recession in Singapore. Unemployment rate rose. As Singapore's social security system was based on employment, it was necessary to reduce labor costs quickly and to a significant extent in order to stabilize employment. At that time, there was no mechanism in place by which wages could be reduced significantly in a speedy manner. It was then realized that, for a small open economy such as Singapore, the seniority-based wage system had outlived its usefulness. Another main weakness of the seniority-based

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wage system is that employers oppose the extension of the retirement age under this wage system as they would want to get rid of older workers at the next available opportunity.

As labor costs could not be reduced immediately under the seniority- based wage system, the employer's CPF contribution rate was cut from 25% to 10% in 1986 (Lim and Associates, 1988). This enabled the Singapore economy to recover quickly. However, the social cost of reducing the CPF contribution rate was high. People who made full use of their CPF balances to finance their housing mortgages were badly hit. Unwilling to rely on the CPF scheme as a means to reduce labor costs under similar conditions in the future, the National Wages Council (NWC), Singapore's tripartite wage-determining council, has been promoting the flexible wage system since 1987 (Chew and Chew, 2005).

The Flexible Wage System

Under the flexible wage system, the income of a worker comprises a fixed income component and a variable component, often referred to as an annual bonus. The fixed income component is still based on seniority even though it now accounts for about 90% of total income. As shown in Figure 2, when a company performs well in terms of its profit margin, the value of marginal product of labor which is affected by the price of the product rises. In other words, the VMP curve is linked to the business cycle although the linkage varies from firm to firm. Workers therefore would get a larger bonus when the company performs well.

Figure 2 The Flexible Wage System

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Indeed, many firms have implemented the flexible wage system to varying degrees since 1987 in two main ways: introducing a bonus into the wage system and gradually reducing the difference between the starting and retiring wage levels, and narrowing the maximum-minimum wage gap under the seniority-based system for the fixed component portion of the income.

However, the flexible wage system was not effective in reducing labor costs immediately in the 1997 East Asian Currency Crisis, even though it was designed to lower wage costs by reducing bonus payments during a recession. There were a number of reasons for this:

i. The flexible wage system was not widely implemented. ii. Transition from the seniority-based wage system to the flexible

wage system was more difficult than perceived. As diagram 1 depicts, a worker under the seniority-based wage system would have accumulated a significant sum in terms of the difference between his VMP and his earnings by the age of 30, and he might expect his employer to compensate this amount to him if he were to be placed on the flexible wage system. But most employers would be reluctant to compensate such a large amount.

iii. Employers did not see the need to share information with workers.

iv. Firms could easily retrench workers. v. Perhaps most importantly, there was no mechanism by which

firms could use the flexible wage system to lower labor costs in a concerted manner because the bonus varies in size and timing from firm to firm.

Consequently, the employer's CPF contribution rate was again reduced from 20% to 10% in 1999 in an attempt to regain Singapore's lost competitiveness.

However, Singapore is determined to promote the flexible wage system because the CPF scheme definitely should not be used as a macroeconomic instrument and cannot continue to be used as a macroeconomic instrument because any change in the CPF contribution rates affects property prices and funds for retirement; most importantly, it becomes a crutch to firms in Singapore as they expect the government to bail them out every time there is a recession. Thus, since, 1999, the NWC has been promoting the implementation of the Monthly Variable Component (MVC) which is a special case of flexible wage system.

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The Monthly Variable Component (MVC)

The present wage system comprises the monthly basic wage, an annual wage supplement (known as 13th month payment) and an annual bonus. Generally, the monthly wage component accounts for 80% of wage costs and the two annual components combined account for 20% of the wage costs. With the MVC, the wage system would consist of three components: the monthly basic component, the annual component (comprising the 13th month payment and the annual bonus) and the monthly variable component. Both the government and the NWC feel that the monthly basic wage component should account for 70% of the wage costs, with the annual component accounting for 20% and the MVC 10%. If this were the case, it would be possible to speedily reduce the annual component and the MVC, which in total would account for 30% of total wage costs, in the event of a crisis. In this case, there would be no need to reduce the CPF contribution rates to regain competitiveness for Singapore.

The issue is how to promote the MVC. It is impossible to reduce the basic wage component to achieve the desired ratio. The government and the unions have since been promoting the gradual building up of the MVC. This can be achieved by having employers slow down the increase in the monthly basic component when economic conditions improve and employers need to increase wages. Thus, if an increase in wage costs of 4% is planned, a fraction of the increase should be allocated to the MVC. This practice should continue until the MVC grows to become 10% of the total wage costs.

While the MVC is a good idea, workers need to be educated to realise that the MVC can fluctuate and that it should not be used to service any mortgage. As both the government and especially the unions have been actively promoting it, the MVC as an instrument in the wage system can be widely implemented. Employers must also be educated to realize that, in the event of another recession in the future, it may not be easy for the government to bail out the employers by reducing CPF contribution rates as the industrial relations scene may not be the same. Hence relying on the MVC is a safer bet.

However, there is a possibility that the MVC may not be effective as an instrument for restoring cost competitiveness for the following reasons: The MVC may not be as widely accepted as the flexible wage system, which would limit its use and impact on wage costs if we have to decrease the MVC to cut wage costs. secondly, If the MVC is stable, which would

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be the result if there is continued prosperity, workers' hire purchases especially on housing may be tied to the MVC in addition to the basic wage. Hence, a proposed cut in the MVC may give rise to great resistance. Thirdly, as with the flexible wage system, a cut in the MVC is not mandatory and therefore may not effective in an economic crisis.

Furthermore, there may be resistance against the implementation of the flexible wage system. When the demand for a firm's product/service decreases, it can try to boost its competitiveness by reducing labor costs, which it can easily achieve if the flexible wage system is implemented. This will avoid the need to retrench workers during a recession, which is precisely what the government wants to prevent. However, many firms in Singapore, especially those in the construction industry, employ a substantial number of foreign workers on contract. During a recession, such firms can simply retrench their foreign workers in order to cut costs. Consequently, firms that reply on foreign workers may not be very keen in implementing the flexible wage system.

Extent of Implementation of the Flexible Wage System in Singapore at the Macro Level

The main body promoting the flexible wage system is the tripartite National Wages Council (Chew, 1996) comprising representatives from the NTUC, the Singapore National Employers' Federation (SNEF) and other employers' federations, as well as various government ministries. It is therefore expected that unionized firms would have a greater propensity to implement the flexible wage system. In the case of employers, large firms are also expected to have a greater propensity to implement the flexible wage system than small firms because most of the firms represented by the employers' federations in the NWC are large firms and are therefore more likely to follow the NWC's recommendations. From the perspective of the government, the various ministries also pay more attention to large firms as the impact of recession on large firms would be larger.

Hence, in examining the evidence of the extent of implementation of the flexible wage system, we would expect the following propositions to be supported:

1. Employees from large firms are more likely to adopt some form of the flexible wage system;

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2. Employees in unionized firms are more likely to be covered by the flexible wage system;

3. Employees in firms that are more prone to recession are more likely to be covered by the flexible wage system.

The main features of the flexible wage system are:

i. Implementation of the variable bonus linked to Key Performance Indicators (KPI);

ii. Introduction of the Monthly Variable Component (MVC) in the wage structure;

iii. Narrowing of the maximum-minimum salary ratio for the majority of employees to an average of 1.5 or less.

As Table 1 shows, in 2004, 63% of the employees in Singapore were employed under a wage system that incorporated at least one the above three features. This means that 37% of the employees were under a wage system that did not have any flexibility. This means that for these firms, if the demand for their products/services were adversely affected by recession, the only option is retrenchment.

Table 1 shows that, of the firms employing less than 200 workers, only 42% of the employees were covered by some form of the flexible wage system, while 80% of the employees of firms employing more than 200 workers were covered by a flexible wage system. The Z-test confirms that these figures are statistically significant at a = 0.05. Hence the null hypothesis that employees in larger firms are no different from employees in smaller firms in being covered by the flexible wage system can be rejected, and Proposition 1 is supported (see note 4 of Table 1) .

In the case of unionized firms, more than 91% of the employees were covered by some form of the flexible wage system, while only 48% of the employees of non-unionized firms were covered by a flexible wage system. Again, the Ztest confirms that these figures are statistically significant different at a = 0.05. Hence the null hypothesis that employees in unionized firms are no different from employees in non-unionized firms in being covered by the flexible wage system can be rejected, and Proposition 2 is supported.

Therefore, to promote wider implementation of the flexible wage system, all parties including the government, trade unions, the NWC and other organizations such as the Singapore National Employers Federation (SNEF) should focus on smaller firms and non-unionized firms.

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The Journal of Comparative Asian Development

Table 1 Proportion of Employees under Flexible Wage Systems, Singapore

(As at 30 June 2004) (%)

Number of Features of Flexible

Some Form of Wage System Implemented

All Wage Flexibility Three Two One None Industry Employees (a) + (b) + ( 4 (a) (b) (c) (dl

All Industries 100.0 63.2 11.6 22.9 28.7 36.7

By Firm Size

25-199 Employees 100.0 41.8 3.0 12.1 26.7 58.2

200 or more Employees 100.0 79.6 18.2 31.2 30.2 20.4

By Union Status

Unionized Firms 100.0 91.4 27.1 39.0 25.3 8.6

Non-Unionized Firms 100.0 48.3 3.4 14.4 30.5 51.8

Notes: 1. Three features are: Variable Bonus linked to Key Performance Indicators (VBIKPI),

Monthly Variable Component (MVC), and Max/Min Ratio - narrowed, decided to narrow or in process of narrowing maximum-minimum ratio.

2. Figures may not sum to 100% due to rounding; 3. An effective representative sample of 2,300 private sector establishments each employing

at least 25 workers. 4. The null hypothesis: P,=P,

- x, +x2 where px = - "I +n2

The 95% confidence interval of 4 -4 is (0.259, 0.505). As the lower limit value is positive, the null hypothesis is rejected.

Source: Manpower Research and Statistics Department, September 2004, Singapore.

As shown again in Table 1, in terms of implementing one feature of the flexible wage system, there is no difference by firm size and union status. For instance, the percentage of workers of smaller firms employed under a wage system that implemented at least one feature of flexible wage system is 27%, compared to 30% in the case of larger firms. On the other hand, the percentage of employees of unionized firms that worked

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under a wage system that implemented at least one feature of flexible wage system is only 25% compared to 31 % from the non-unionized firms. The evidence shows that, in implementing the flexible wage system, large firms and unionized firms went further by implementing two or three features of the flexible wage system.

Table 2 reveals that having the variable bonus linked to KPI was the most commonly implemented wage recommendation. Overall, 42% of the employees in the private sector had, as part of their wage structure, a variable bonus linked to KPI. About 35% were employed in establishments that had narrowed the maximum-minimum wage ratio for the majority of their employees, or had decided to or were in the process of doing so. Following closely behind is the implementation of the MVC which covered 33% of the employees. The figure for each of the three wage recommendations was higher for the larger as well as the unionized establishments, which is consistent with our hypotheses discussed earlier in this section.

Table 2 Proportion of Employees by Features of Flexible Wage System (As at 30 June 2004)

Variable Bonus Narrow Emolovees Linked to KPI MVC Max/Min Ratio

All Industries 42.0 32.9 34.5 By Firm Size

25-199 Employees 26.1 14.1 19.8 200 & More Employees 54.1 47.3 45.7 By Union Status Unionized Firms 63.1 68.4 53.1 Non-Unionized Fms 30.7 14.0 24.6

Notes: 1. Figures do not sum up to 100% as firms can implement more than one key wage

recommendation. 2. An effective representative sample of 2,300 private sector establishments, each employing

at least 25 workers. Source: Manpower Research and Statistics Department, September 2004, Singapore.

In terms of the number of firms, Table 3 shows that 41% of the private sector establishments with at least 25 employees had some form of wage flexibility. As expected, a larger proportion of the large establishments had implemented flexible wages (67%) than the smaller

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ones (38%). Similarly, the percentage is higher for unionized (78%) than non-unionized (36%) establishments.

Table 3 Proportion of Firms by Number of Key Wage Recommendations Implemented

(As at 30 June 2004)

Number of Key Wage S ~ ~ & ~ ~ Recommendations Implemented

All Flexibility Three Two One None Industry Firms (a) + (b) + (c) (a) @) (c) (d)

All Industries 100.0 41.1 3.3 11.5 26.3 58.9

By Firm Size 25-199 Employees 100.0 37.7 2.4 9.6 25.7 62.3 200 or More Employees 100.0 66.5 10.1 25.5 30.9 33.6

By Union Status

Unionized Firms 100.0 78.3 17.0 32.5 28.8 21.7 Non-Unionized Firms 100.0 36.1 1.4 8.7 26.0 63.9

Note: Figures may not sum to 100% due to rounding.

The sole purpose of implementing the flexible wage system is to allow firms to reduce labor cost during recession. Hence, it is expected that the extent of wage flexibility would vary markedly across industries. A taskforce under the NWC targeted at least two specific industrial groups which face cyclical demand, electronics and chemicals industries, as it was felt these two groups needed the flexible wage system the most.

Table 4 reveals that, in Electronics products and Petroleum and Chemical Products, a large majority of the employees (80% and 73%, respectively) were covered by some form of wage flexibility. Generally, the percentages for all the other industrial groups were at about 65%, which is about the same as the overall average of 63%. The only exceptions are food manufacturing (46%) and construction (38%).

The construction sector has the most rigid wage structure, with only about 38% of their workforce covered by some form of flexible wages. The heavy reliance of the sector on foreign workers on term contract that allows for flexibility in adjusting headcount may have resulted in the sector seeing less of a need to implement the wage recommendations. This is consistent with our earlier postulation that firms which can retrench workers easily or recruit foreign workers easily are less keen on the flexible wage system.

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Wage Issues and Human Resources in Singapore 9 1

Table 4 Proportion of Employees With Some Form of Wage Flexibility by Industries

(As at 30 June 2004)

No. of key wage

Some of commendations implemented

flexible wage Three Two One ~ndustry (a) + (b) + (c) (a) (b) (c)

All Industries 63.2 11.6 22.9 28.7

Manufacturing 64.4 13.3 26.7 24.4

Electronics Products* 80.4 16.2 39.3 24.9

Petroleum & Chemical Products* 73.0 3.7 30.9 38.4

Food Products & Beverage* 45.8 7.3 17.8 20.7

Construction 37.6 4.1 5.5 28.0

Services 68.0 11.7 24.7 31.6

Wholesale & Retail Trade 64.6 7.3 17.7 39.6

Notes: 1. Key features are:Variable Bonus linked to Key Performance Indicators VB(KP1); Monthly

Variable Component (MVC); MaxlMin Ratio - Narrowed, decided to or in process of narrowing maximum-minimum ratio;

2. Figures may not sum to 100% due to rounding; 3. An effective representative sample of 2,300 private sector establishments each employing

at least 25 workers. Source: Manpower Research and Statistics Department, September 2004, Singapore.

In general, 59% of the firms did not implement any feature of the flexible wage system in 2004. The proportion of small firms which did not implement the flexible wage system was 62% compared to 34% for large firms, while the proportion of non-unionized firms which did not implement the flexible wage system was 64% compared to 23% for the unionized firms.

Hence at the macro level, while it may be said that a lot of progress has been made in promoting the flexible wage system, further effort needs to be expended in this direction.

Extent of Implementation of the Flexible Wage System in Singapore at the Plant Level

As is obvious from the preceding discussion on the relative advantages of the various wage systems and the difficulties experienced in the

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transitional stage, the implementation of the flexible wage system is not without its difficulties. Implementation problems stemmed from both the resistance faced by the employees as well as the employers in the process of implementation. Therefore, a discussion of the issues in the implementation of FWS from both the employees' perspective as well as employers' perspective is needed.

Issues from the Employees' perspective

One of the major reasons for the delay in the implementation of the EWS lies in the resistance from employees who fear that the FWS may be used as a means by which employers can exploit workers and reduce wages indiscriminately. From the employees' perspective, there are a number of issues that makes the FWS unattractive:

i. FWS may increase income instability and reduce take-home pay Employees may be reluctant to accept the enhanced FWS if they believe that it will lead to greater instability in income, and are unwilling to accept more variability and uncertainty in income in exchange for more job security. Moreover, employees are afraid that there would be abuse of the MVC scheme, as some employers may be quick to cut wages but slow to restore the MVC, or exploit the MVC system, using it as a pretext for further wage cuts.

ii. Bonuses based on measures of productivity may not reflect etnployee performalzce Employees may be wary of and resistant to the use of KPIs, such as Growth Rate, Return on Equity (ROE), Return on Investment (ROI) and Economic Value Added (EVA) as measures of company productivity for determining the size of employees' annual bonus. Many employees believe that they would have to bear the brunt of any losses incurred by the firm, whether or not they are directly responsible for the firms' losses. For example, an employee who consistently works harder than his peers may not receive wages that are commensurate with his efforts, because of the use of company KPIs which reflect the contributions of employees as a whole. When company performance deteriorates, company KPIs will reflect this and the hardworking employee will not compensated adequately. Hence,

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he would not be motivated to contribute to the company's profitability. Even with the use of peer appraisal and management observation to measure personal productivity for the purpose of wage determination, subjectivity is still inherent in the evaluation process.

iii. Lack of information on company pe$ormance Even when employees agree that wages can be effectively determined by KPIs, many still feel insecure about whether their pay would be commensurate with company performance, as they do not have full information on the profitability of the company. Furthermore, they are wary of possible profit manipulation on the employers' part to prevent employees from getting their due rewards in times of prosperity. Without a proper policy of information-sharing, employees would always doubt whether the flexible wage system is fair to them. This adversely affects the morale of employees.

Issues from the Employers' Perspective

The enhanced FWS appears to be advantageous to employers because it allows them to cut wage costs quickly in sudden economic downturns without layoffs. However, many employers still have their reservations due to the following factors:

i. Willingness of employees to accept reduced wages during business downturn to secure their jobs Employers might be reluctant to adopt the FWS because they believe that their current wage structure is already flexible enough for them. Most employers of small companies do not see the need to implement the FWS because they can easily persuade their small number of workers to accept wage cuts without the need to adopt the regulatory guidelines of the F W S and cut MVC. In the case of larger establishments such as the multinational companies (MNCs), their wage structure is determined by their head office, which might not support the Singapore plant's decision to cut wages in lieu of saving jobs.

ii. Inherent labor costflexibility within speci$c industries The nature of the industry in which the company operates also affects the adoption rate of the FWS because it might not be

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appropriate for certain industries such as the construction sector or the food manufacturing sector. The low rate of implementation in the construction industry might be due to the industry's heavy reliance on foreign workers who are on term contracts. In times of crisis, when projects are few in number, construction companies can easily choose not to renew contracts with the workers to save wage costs. The same is true of the food manufacturing sector. With a large proportion of its workforce consisting of part-time workers, there is no need for such companies to incorporate flexibility in their wage structures.

iii. Higher administration costs, egurt and complexity with the FWS One factor which might affect employers' decision on implementing the FWS is the consequent impact on administration effort and costs. Keeping track of the amount of MVC available in the employees' account requires additional administrative work, which inevitably increases administrative costs. This actually contributes to an overall increase in costs, contrary to its objective. Both the increase in costs and in administrative work resulting from the implementation and monitoring of the FWS might discourage employers from adopting the MVC scheme. Employers are also worried that the company's wage structure might become too complex, thus making the determination of the wage a complicated and time- consuming process.

iv. Retrenchment regarded as a better option In times of business downturn, employers can cut costs in one of two ways: reduce the MVC if the FWS is implemented, or simply retrench workers. Many employers feel that the second option is a better option because it permits them to retain the higher-skilled and more productive workers and retrench the under-performing workers, while the option of reducing the MVC cuts throughout the entire company. Hence, many employers would prefer to retrench workers rather than adopt the FWS.

v. Reluctance to be regarded as the bad guy Many employers prefer to adopt a wait-and-see approach toward implementing the FWS because they are reluctant to be among the first to adopt the new wage scheme for fear of making a mistake. Employers do not want to be regarded as the 'bad guys' by their employees in being eager to cut wages and exploit

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workers in an economic downturn. Hence, they prefer to let the government or the NWC do the unpleasant job of initiating pay cuts.

The importance of the above factors in determining the implementation of the flexible wage system will be ascertained through a case study of three firms in an industry in Singapore. Owing to sensitivities regarding the nature of the survey, the industry cannot be identified.

A Case Study of an Industry in Singapore

This industry in Singapore began the localization of management in the early 1970s. It also moved increasingly into capital-intensive and knowledge-based work, and is able to offer complete solutions with proprietary designs and products that are some of the world's best. Supporting services companies have joined the firms in this industry to offer comprehensive support services. To compete against lower cost and emerging countries, the industry went through a consolidation and relocation exercise which, while keeping in line with Singapore's economic and land-use plans, enabled the industry to maintain its competitiveness. The industry is currently a major contributor to the Singapore economy and is the training ground for skilled manpower and managerial talent in the engineering field.

In a survey of firms in this industry during February and March 2005, 167 respondents comprising 83 union officials out of 150 union officials (giving a response rate of 55.3%) and 84 ordinary members out of a total of 800 members (which gives a response rate of about 10.5%). A summary of the survey results are given in Table 5.

This finding is further reinforced by the fact that only 17% of the respondents experienced a reduction in their bonuses and take-home pay after the implementation of the FWS respectively, which dispels the fear that the implementation of FWS would be used by employers to reduce bonuses or take-home pay. In fact, the fall in bonus and take home pay was due to poor performance on the part of the workers and less overtime.

Apart from the summary information provided in Table 5, the survey also reveals that, while 77% of the union members who responded felt that their companies have tried to increase employees' cooperation in implementing the FWS, and that union officials played an important role

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Table 5 Views of Union Members and Union Officials on the Flexible Wage System

Union Ordinary officials members Total

Composition of respondents 83 84 167

Satisfied with the adoption of FWS 71 (85.5%) 60 (71.4%) 131 (78.4%)

Fully understood the purpose and rationale for the implementation of FWS 74 (89.2%) 68 (80.9%) 142 (85.0%)

More motivated to work after the implementation of FWS 68 (82.0%) 63 (75.0%) 131 (78.4%)

Believedjob is enhanced with 66 (79.5%) 70 (83.3%) 136 (77.8%) the implementation of FWS

Confident that bonuses be given 66 (79.5%) 64 (76.1 %) 130 (77.8%) when company is doing well

Experienced decrease in bonus after implementation of FWS 15 (18.1%) 14 (16.6%) 29 (17.3%)

Experienced decrease in take home pay 11 (13.3%) 17 (20.2%) 28 (16.7%) after implementation of FWS

Received relevant information on company performance 36 (43.4%) 32 (38.0%) 68 (40.7%)

Source: Survey conducted by Pok Siau Jia, Wang Kangzhong and Goh Zhaoying under the supervision of the authors.

in implementing the FWS and were instrumental in helping the majority (70%) of the union members understand the purpose and rationale of the FWS, only 43% of the respondents indicated that there was sharing of company information with employees. Since bonuses are directly related to the company's performance under the FWS, companies should be more willing to share information with their employees.

Four out of five of the union members indicated a preference for wage cuts to retrenchment, which shows that most employees support the FWS. The majority (67%) of the respondents in the company received a minimum of 2 months' year-end bonus in 2004. Hence, most of the respondents (86%) were positive about the changes brought about by the FWS. Nevertheless, only 24% of the respondents felt confident about the fairness of the FWS (i.e., that they will receive an increase in bonuses and wages if their company's profitability increases), even though most employees (86%) are subject to a performance appraisal system at work. Hence, the fear that employers may exploit the FWS to their advantage is quite real.

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Thus, there are still reservations regarding the FWS, as 63% of the union members who responded indicated that fear of frequent wage cuts is the main obstacle in attempting to implement the FWS. Most of the ordinary members who were not happy with the adoption of the Flexible Wage System were concerned about future wage fluctuations and the increased frequency of pay cuts that may occur as a result of the implementation of FWS. They were also concerned that the FWS may be more favorable to employers than to employees. Some of the respondents felt that they are not paid according to their work performance, which may be due to the lack of effective performance appraisal systems in the company. To the ordinary members, what matters is their take-home pay and hence they are particularly sensitive to any wage changes that will inevitably occur with the implementation of the FWS.

The survey reveals that the FWS generally has a positive impact on employee work motivation. This is because of reduced retrenchment and improved job security during business downturns. It also shows that the FWS involves the use of clearer performance indicators and guidelines, which encourages workers to be more productive. These factors explain why the respondents are generally more motivated to work after FWS implementation. However, some of the respondents feel that they have no bargaining power over wage issues and simply have no choice but to follow company wage policies. Others feel that they would still have to work hard for their pay no matter how much or how little the flexible wage structure has changed.

Some of the union members believed that clear performance appraisal systems do help to enhance workplace productivity. In addition, some of the respondents felt that effective performance appraisal systems help to enhance transparency in performance evaluation and eliminate bias in performance appraisal. However, others stated that there was a lack of transparency of the performance appraisal systems, which may be due to lack of information-sharing or understanding of performance indicators.

In the case of the union officials, while most (86%) were satisfied with the implementation of the FWS, about 11% stated that they did not understand or support the principles of the FWS. This shows that even union officials may not understand and need to be educated on the principles of the FWS, let alone the average worker.

Furthermore, while most (86%) of the union officials agreed that the FWS is to the long-term advantage of workers, a substantial proportion (67%) felt that the implementation of the FWS was unnecessary because

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the existing wage system was flexible enough, even though 94% agreed that the FWS will enable the company to reduce costs in the long run. Nevertheless, at least 73% agreed that the FWS has increased their motivation to work. As with the union members, a substantial proportion of union officials (63%) believed that the most important barrier to the implementation of the FWS is the fear that it would lead to frequent wage cuts. Another obstacle that union officials (20%) believed would block acceptance of the FWS is the lack of understanding of how the FWS works due to the educational level of the workers.

Union officials have mixed sentiments regarding the effectiveness of performance appraisal systems in the company, as only 53% believed in their company's performance appraisal system. Furthermore, while every four out of five of the union officials were confident that the company would raise pay and bonuses with improved profitability and that the FWS has increased job security, less than half (39%) felt that they had been given sufficient information on company performance and profitability.

One recommendation made by union officials is for management to try to better understand the working environment and the feelings of worker in order to enable them to formulate appropriate and effective key performance indicators. Others pointed out the need for transparency and openness of the performance evaluation systems. Many emphasized the need for fairness in such systems, and for assessments based on individual merit.

Many union officials felt that the FWS is beneficial to the company because it enhances wage flexibility and cost management, especially when wages constitute a significant proportion of total company expenditure, and that it helps to enhance job security by reducing the need for retrenchment. They also expressed the belief that the FWS will benefit the company in the long run as it enables the firms to save on rehiring and training costs in the long-run. In contrast, others were of the opinion that the FWS will not help reduce costs for the company because it causes a drop in the morale of the employees which lowers their productivity as a result. At the same time, other union leaders believed that the FWS provides a better work environment in which every policy is clearly indicated and results in better understanding of job scope and tasks on the part of workers, as well greater transparency in the wage determination process.

Union officials also voiced the fear that the implementation of the

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FWS will result in the need for less overtime, and hence bring about a fall in income. Some were of the opinion that once a pay cut occurs, it is unlikely that pay will be restored even if the economy recovers. Some were concerned that, with the implementation of the FWS, employees' basic wage will be reduced, thus lowering the amount of take-home pay. Such fears would hamper acceptance of the FWS.

However, some of the union officials were of the opinion that union members do not understand the FWS. They pointed out that members could not fully understand the principles of the FWS even though a briefing was conducted. This could be due to their educational level and lack of interest regarding flexible wage structures.

In summary, the survey reveals that employees in this industry have sufficient understanding of the FWS and have accepted it. They feel more motivated to work after its implementation, and most of them feel that job security is enhanced. This scores a significant point for the FWS because most the respondents belong to the less educated group with relatively low take-home pay. They are thus more sensitive to changes in the components of their pay, and initially resistant to any changes in their pay for fear of abuse of the wage structure by employers.

It also reveals that more should be done to improve the communication of information to employees on company performance, as only 41% received such information, and increase the percentage of employees in the company that receives information on company performance.

Conclusion and Recommendations

The improvement of communication and trust is vital for the success of FWS. These two factors are crucial and interdependent on each other. Beside a clear understanding of the rationale for the FWS, employees and management must trust one another to work in cooperation with each other to make the move into the flexible wage system a relatively painless and problem-free process. All the necessary steps for the implementation of the FWS have been laid out by the NWC. What is required now is the reorientation of the mindset and attitudes of the employees and employers to facilitate full acceptance of the FWS.

To achieve this, the tripartite players should continue to hold meetings and seminars to educate employers and employees on the need

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for the FWS and its benefits to them in the long-run. In addition, tripartite teams that look into industrial relations and employment-related issues can be formed to build trust and enhance communication of such issues. With the support of government leaders, union officials and employers, issues that crop up during the implementation can be quickly resolved through open discussions to arrive at a win-win solution for employees and employers.

All employees must be briefed clearly on the principles of the FWS to ensure that their interests are aligned for the smooth implementation of FWS.

The provision of incentives to encourage the unionization of employees will also increase the adoption of the FWS as unionized employees are more willing to accept the FWS. They know that their unions are negotiating for them and that their employers would not make pay cuts without the unions' consent.

Companies can increase the frequency of communication sessions on the company's direction and policies for all personnel. They should also reveal information on business outcomes and key performance indicators in order to facilitate implementation of timely corrective actions by the employees and to ensure a high degree of employee engagement in the FWS. Such improvements in information-sharing will result in greater understanding and clarity of the FWS.

With proper communication channels, concerns of employees can be heard and addressed so that necessary changes to the components of the flexible wage can be made. The recommended measures also help to build trust between management and employees, thus enhancing the level of cooperation in the adoption of the FWS.

The study on this industry demonstrates that the flexible wage system has been implemented successfully. This is possible with proper cooperation among the tripartite parties and appropriate efforts made to educate the employees. With better employee and employer perception of the FWS and the implementation issues involved, measures can be taken to enhance the adoption rate of the FWS by firms in Singapore. These include strengthening the roles of the tripartite parties, emphasis on improvement in information-sharing and the building of trust and effective communication channels. According to union officials, most of the firms in the industry have shared similar experiences. As Singapore is a small and open economy, there is a need to create an effective way to reduce labor costs so as to stabilize employment. Hence, it is imperative

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that both its workforce and employers be willing to embrace the principles of the FWS and push toward the goal of full FWS implementation.

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Wage Issues and Human Resources in Singapore

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Wage Issues and Human Resources in Singapore