SENIORITY-BASED WAGE SYSTEM

Dr Jennifer Lee asked the Minister for Manpower (a) what efforts have been made by his Ministry since the mid 1980s to move Singapore away from a seniority-based wage system; and (b) what strategies and specific plans his Ministry has in the coming years to move Singapore away from such a system.

The Minister for Manpower (Dr Lee Boon Yang): Mr Speaker, Sir, the 1986 Economic Committee identified the seniority-based wage system as one of the weaknesses in our labour market. This system rewards workers more on the basis of their seniority in service and less on the value of the job. Subsequently a tripartite committee under the National Wages Council studied ways to make our wage system more flexible and linked to the value of the job.

The National Wages Council Tripartite Committee on Wage Reform recommended that a flexible wage system with a variable component be implemented. It also recommended that wages should reflect the value of the job and that salary ranges should not be too wide. A reasonable maximum to minimum salary ratio could be 1.5: 1.

Since the implementation of the above recommendations, we have made progress. Today more than 80% of the companies have implemented the flexible wage system with a year-end variable component and the one month Annual Wage Supplement or otherwise known as the 13th month pay, amounting to about 15% to 16% of total wages. The variable component enables companies to reward workers based on company and individual performance. On the seniority-based wage system the ratio between the maximum and minimum salary points for many jobs has been brought down from more than 2.5 times to between 1.5 and 2 times.

While progress has been made in building up the variable component, which is often paid at the end of each year, our wage system is still not flexible enough to respond to the rapidly changing business conditions. Hence, in 1999 the National Wages Council recommended that a monthly variable component be introduced to enhance the flexibility of our wage system. With regard to the seniority-based wage system, more efforts have to be made to further narrow the maximum to minimum salary ratio and to actively promote a system which rewards workers based on the value of the job and their contribution. This will enhance the cost-competitiveness and employability of older workers who face a higher risk of losing their job and greater difficulty of seeking re-employment due to our seniority wage system.

This year, the Economic Review Committee Sub-committee on Taxation, CPF, Wages and Land has been tasked to review the wage system in Singapore. The Sub-committee's initial recommendation to reduce CPF contribution by employer for employees aged 50 to 55 has already been accepted by the Government. Apart from this, the NWC will continue to encourage companies and unions to accelerate the building up of the monthly variable component and to further evolve a wage system based on the value of the job as well as the productivity and performance of individual employee.

Dr Jennifer Lee (Nominated Member): Clarification, Sir. Obviously, as the Minister has said, the system is not there yet. But at what point, in terms of salary scales and variable components, will the Minister feel that we would have arrived at a stage where we are not on a seniority-wage based system, so that we no longer have to be anxious in future about other ways of approaching it, such as further CPF cuts for the older age group?

Dr Lee Boon Yang: Mr Speaker, Sir, I think the situation is dynamic and it is constantly evolving. In the mid-80s, as I mentioned in my main reply, the Tripartite Committee considered that if the variable component comprised something like 18-20%, we would have more or less achieved significant progress and we would have succeeded to make our wage system flexible enough. We are almost there. As I said, 80% of our companies have adopted the variable wage system. The variable component is around 16-18%. But in recent years, the pace of change has been so fast. Competition has been heating up so rapidly. We may not be sufficiently flexible with what we have achieved so far. So we have to push the envelope up a little bit more.

It is very difficult to determine, at this point in time, what percentage of the wages should be variable for us to be truly flexible, adaptable and responsive to the market changes. I think that can only be determined in the actual labour or employment market situation and also in the context of economic performance of the day. It is rather difficult to predict in advance. But what we want is to evolve a system, for instance, the monthly variable component, where you set aside 10%, or maybe 12% of your monthly wages as a variable component which companies may be able to adjust, if there is a sudden downturn in demand, or businesses drop sharply. The company can then use this MVC, comprising about 10% of the monthly wages, to make an adjustment which helps the company to weather the downturn and also reduce the burden on the company so that they do not have to instantly resort to redundancy or retrenching workers. These are just ballpark targets. But whether 10% is enough will have to depend on the state of the economy and the kind of competitive pressure that we have to face. It may well be that the 10% is sufficient. But it may also be that, as the scenario unfolds, we may need to build up more of our wages into the monthly variable component. So let us take an open-minded approach to this. Let us continue to progress on our development of a flexible wage system and then assess our competitiveness and ability to resist all these sudden changes.

Dr Jennifer Lee: There are two parts to this. One is the flexible system that allows companies to cut costs down quickly. The other is the seniority-based wage system, and my focus is actually on seniority-based wage system. I would just like to clarify if my understanding is correct. What we are talking about here, in terms of monthly variable component, is actually a variable system but within a seniority-based wage system. In other words, the older workers are still getting more, which means that this particular emphasis on MVC will not actually address the seniority-based wage system. Would that be the correct understanding?

Dr Lee Boon Yang: With regard to the seniority-based wage system, as I said earlier on, we started out in the mid-80s with a maximum to minimum ratio of 2.5 to as high as 3.3. Over the years, this has been trimmed down. Today, we are around 2 to 1.5. I think maybe 1.5 is about reasonable, that means, between the starting point and the last point in the salary scale, it is a difference of 1.5. That is what the NWC Tripartite Committee recommended in the mid-80s to be a reasonable maximum to minimum ratio. We have not quite arrived at it. Some companies have, but there are still many other companies operating at a ratio of 2. So they will have to individually start to make adjustment to try to bring this seniority-based wage scale to the figure of about 1.5:1. And if we get to 1.5:1, we should have a more manageable system.

Dr Jennifer Lee: If I may again ask the Minister: is he actually saying that when we reach 1.5, then in fact we can be quite comfortable that there will no longer be any need to have differential treatment of older workers versus younger workers. The other point is in fact how much longer will it take us to get that 1.5, if we have a real confidence level that this will take care of the problem. And I am asking this because I think they are all anxious that in the future we do not have to resort to CPF cuts for older workers.

Dr Lee Boon Yang: Mr Speaker, Sir, as I said, 1.5 was set as a target by the NWC in the mid-80s. We have not quite reached this target. When we reach this target, we will have to assess whether, in fact, as expected by NWC in making the recommendation, 1.5 would be a reasonable figure. Of course, the competitive environment changes all the time, the nature of jobs and competition in the employment market changes all the time. So we cannot tie ourselves down to say that this shall be the ratio forever and ever. We have to realise that the labour market is in a state of dynamic equilibrium. It changes all the time, depending on who are our competitors, what is the business that we are doing in Singapore, what kind of value-added that we bring to the companies and to the economy as a whole.

I think we should take this, as I said earlier on, with an open-minded progressive approach. If we reach 1.5, if we are able to sustain employment of all our older workers, then 1.5 is a good target. But even if at 1.5, we find that older workers are continually suffering a disadvantage, in the sense that they have greater difficulty retaining their jobs, they are retrenched, or they have even greater difficulty seeking re-employment, then we have to address this issue whether in fact 1.5 is reasonable, or in fact it should be even less than that.

Dr Jennifer Lee: I would like to ask the Minister how we can have comfort in knowing where we are going. Just trying to determine that we do not see a repetition, how would we know that we are actually making progress? Because it would be a sad situation 10 years down the road to be looking at the same picture again. How would the Minister be able to give comfort, if all that we can say is simply we do not really know what we are shooting for?

Dr Lee Boon Yang: Mr Speaker, Sir, I hope the hon. Member will take comfort from the fact that we have not rushed into this matter of making adjustment to salary scales, nor have we done in a reckless manner. We took careful consideration in the mid-80s with the Tripartite Committee and we have been promoting this concept of a flexible wage scheme and shrinking the difference between the maximum and minimum ratio in our seniority-based wage scale progressively and carefully. So it is not the intention of the Government to force changes upon the people unnecessarily. And if, in fact, as I said, the economic situation takes a turn for the worse and we are seeing a dramatic increase in unemployment among the older workers, then it would be foolish of us to say that we had adopted a certain target years ago, this target should remain in place and we should not make any further changes.

It is not that we wish to impose changes on our workers unnecessarily. But changes are forced upon us. Many of these changes are beyond our control. We are competing in a global market. And if, in fact, we have to make adjustments to our salary structures, we have to do it, just as in 1999, we had to adjust our CPF. So these are drawn upon us by external factors and we must be prepared to respond and adapt to these changes. If we blindly stick to the target and refuse to change, we are going to put ourselves in a very difficult position.

Mdm Halimah Yacob: Sir, I would just like to ask the Minister to confirm whether there was actually a tripartite agreement which provides for this minimum-maximum ratio of 1.5 to be reached over two collective agreements, and that if unions and management could agree, they could of course take a shorter period, and if they cannot, they could take a longer period. Could the Minister confirm whether there is such an agreement?

Dr Lee Boon Yang: Mr Speaker, Sir, when the Tripartite Committee in 1986 made this recommendation to reduce the salary range, it did suggest that unions try to achieve this maximum to minimum ratio within a certain timeframe. I cannot remember exactly what was the timeframe. The hon. Member may be correct in saying that it was over two collective agreements which, in our context, would mean about six years maximum, because a collective agreement runs for up to a maximum of three years. I think many unions have pursued this recommendation. That is why we have seen a significant improvement in this salary ratio, and we have come down from 2.5 to 3.3, down to 1.5 to 2. So improvements will be continuing in this fashion as the collective agreements are renewed.

Dr Jennifer Lee: May I ask whether the civil service timescales are, in fact, now at 1.5?

Dr Lee Boon Yang: Mr Speaker, Sir, I do not have the civil service timescale figures with me. So I would not be able to comment on that directly.

Dr Jennifer Lee: Would the Minister give us the assurance that at least the civil service would take the lead in this regard, and if they are not at 1.5, that would be the direction in which the civil service would be moving?

Dr Lee Boon Yang: Yes, Sir, the civil service has been taking the lead in this matter, in terms of having a flexible wage system and also reducing the maximum to minimum salary ratio. The civil service, in fact, has been one of the earliest to implement a monthly variable component. And it has also introduced the annual variable component and mid-year bonuses. All these components of a variable and flexible wage system, a performance-based wage system, has been spearheaded by the civil service. I believe the civil service would continue with the approach to achieve a more flexible and realistic wage system.