The government of Singapore in April increased salaries across the board, with lavish increases heaped upon the country’s ministers who clocked up a 60% pay increase. No, that’s not a typo, it was really that much, and that too from an already high base. The average salary of a government minister in Singapore, set at US$1.25 million, is about five times what a senior government functionary can expect to get in the United States, and between 20 and 50 times what an equivalent member of China’s or India’s government would expect, at least officially. [1]

Explaining the rationale for setting government pay at such high levels in Singapore, the country’s redoubtable founder said of the idea of paying Singaporean ministers the same as those in neighboring Southeast Asian countries: [2] “Your apartment will be worth a fraction of what it is,” he said. “Your jobs will be in peril, your security will be at risk and our women will become maids in other people’s countries.” The translation, for anyone outside Singapore, was that you’d have to risk becoming a poor Filipino maid or a corrupt Indonesian trader to question the right of Singaporean ministers to such gargantuan salaries.

While the explanation may strike normal people as a tad excessive, it resonates strongly across Asian government circles a full three months after the comments were published. The reason, of course, is that government officials perennially feel under-appreciated for their work, despite multitudinous achievements that they can point to such as the grass growing in a Manila lawn. Of course, 60% pay increases also feel right as a way of explaining your expectations to the taxpaying public – not exactly double, but still high and specific enough to appear as if one has done proper research into what the hike should be.

Why government

Before determining the right strategy for paying people, it is customary in the private sector to question what is being attempted in the first place. In other words, what exactly does government do?

The answer is delightfully imprecise, and depends very much on the country in question. That diffusion in objectives, ranging from the very limited state apparatus for such countries as Switzerland against the all-encompassing governments more prevalent in Asia, is an important differentiating point all by itself. Simply put, more focused governments have to pay less to attract workers, as compared with “one size fits all” governments that necessarily have to pay more to attract better-quality talent.

A related albeit secondary consideration is the actual availability of employable residents in the country, which helps to determine the scarcity value of any government job, in turn helping to set the pay. For countries like Singapore, where economic growth has been substantial and opportunities for participating in the private sector are very high, the issue is more relevant than for other countries like India where available talent far outstrips demand from the private sector (at least until very recently).

The third factor is to determine why people want to join the government, and indeed what kind of people do. To a large extent, that is determined by the objectives laid out above, but there is no accounting for human emotions. Thuggish governments inevitably attract schoolyard bullies as recruits, while overambitious governments attract romantics. This is no idle consideration, as pay is an incidental benefit to government employees keen on beating up fellow citizens or, worse, the ones who see themselves as performing a public service. It is only for the people in the middle that pay becomes relevant.

The fourth and last consideration is of course how long the intended service would be. It is generally assumed that government work is for life, but that view has changed across the United States and Europe over the past few years. As government needs become more diversified, for example in establishing new security protocols on Internet applications, there is a need to hire temporary workers with the right skill set. Usually, this is done on a project basis, so that governments do not hire people but merely rent them for the purpose of achieving the objectives. Going back to the original point about length of service, pay is set according to the expectation of a long service.

Setting correct pay

Controversies around the right pay levels for government employees are not new, [3] but certainly have acquired increased urgency in an environment where comparisons across countries have become easier to do, as has mobility of labor. That said, it is also easy to overestimate the mobility of labor, as Singapore appears to have done recently. After all, US$1.25 million is a princely sum in even the private sector, and when one considers the specialist skills that are demanded for such amounts, it is very difficult to believe that more than a handful of government officials would ever attract such salaries while in the private sector.

That aside, the point is to pay government workers enough to keep them motivated, but not excessively as to attract complacence. In other words, a portion of pay must always be variable against the achievement of quantifiable objectives, be they roads or irrigation canals or, indeed, law and order. But this is also where the problem arises for governments that attempt too many things.

In particular, Asian governments are finding it increasingly difficult to retain managerial talent in state-owned enterprises. China has seen a succession of poorly paid managers at top banks who failed to meet required standards of prudence and propriety. Two such bank chiefs were arrested and executed for embezzlement over the past 10 years. Similar problems of poorly paid managers taking excessive risks to supplement their incomes have hurt the performance of other Chinese companies based in Singapore and elsewhere.

More recently, the Indian government failed to find appropriate candidates for a number of top jobs in state-owned companies because the level of pay was too low to attract the right kind of talent. With a number of activist investors on the loose across the region, [4] good managerial talent has been snapped up, leaving only the dregs for governments to hang on to.

Thus the key mistake made by the two giants is to assume that anyone with even half a brain would want to head up a company owned by a government department. This process, which is called adverse selection by game theorists, logically leads to governments attracting only the inept and the corrupt into service. In turn, the prevalence of such people in power puts off any qualified applicants.

The experience of Singapore in overpaying its officials should serve as a warning for other Asian countries, as must the rampant failures across China and India of senior government officials who simply fail to perform or even show up. Perhaps the most important lesson is for governments to trim down and focus on the most important deliverables only, such as law and order, defense and related security matters, thereby leaving the rest of the economy open to market forces.

Notes
1. The wages of corruption, Asia Times Online, August 19, 2006.
2. Lee Kuan Yew, in the International Herald Tribune dated April 9, 2007.
3. Kautilya’s ancient epic the Arthashastra was perhaps the first formal codification of government pay, albeit one that focuses exclusively on the revenue-based method of determining pay.
4. Barbarians at Asia’s gates, ATol, January 27, 2007.

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