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How to Exploit Singapore’s New Wage Credit Scheme

24 March, 2013

The Singapore Government recently announced 2013 budget initiatives aimed at improving the lives of Singaporeans, especially those with lower incomes. A key feature is the Wage Credit Scheme, under which the Government will cover the cost of 40% of pay raises given during 2013, 2014 and 2015, for Singaporeans making up to $4,000 per month.

This scheme offers free money from the government to employers who increase wages. Employers that are “kiasu” (money savvy) will want to take maximum advantage of this opportunity, while avoiding the risk of finding themselves with increased fixed salary costs when the scheme expires, that are not sustained by actual productivity improvements. This blog post presents my thoughts on how to exploit the scheme and avoid the fixed cost risks, by preparing productivity-based incentives that can be implemented before the scheme expires in 2016.

The Wage Credit Scheme (WCS), which is explained on the IRAS website (go to www.iras.gov.sg/irasHome/wcs.aspx) states  that “WCS aims to support productivity gain sharing between employers and employees through meaningful wage increases, especially for lower wage workers.”

You may be wondering how a government reimbursement helps productivity. The answer is clear when you consider what will happen if an employer simply accepts the reimbursements each of the next three years and neglects its business productivity. What will happen is this: the business will raise its fixed salary costs with no associated sustainable revenue increase and/or cost reductions in other areas. If, however, the business can increase revenues or reduce costs with the same workforce, the added revenue can sustain the wage increase subsidies (wage credits) going forward. As Henry Ford, inventor of the automobile assembly line, said:

It’s not the employer who pays the wages. The customer pays the wages. The employer just handles the money.     –Henry Ford

Ultimately, an increase in overall fixed costs must be funded by sustainable revenues from actual customers. If a business lacks a firm plan for sustainably higher revenues, then it must focus on controlling fixed costs. But it would be foolish to hold down salaries for those making less than $4,000 per month when there is free money on the table! Therefore, the three-year wage credit scheme represents a crucial window of opportunity to improve productivity, so that wage increases during 2013-2015 can be sustained, or even enhanced in future years, after the WCS expires, allowing a business to exploit the Wage Credit Scheme, with minimum worries about go-forward fixed salary costs.

My general recommendation, based on managing compensation for multinationals since 1991, including several years in Singapore, is this: give good increases to those making less than $4,000/month, promote innovation that leads to productivity improvement, establish internal measures of productivity, then begin rewarding productivity with a portion of the gains. Do this before the wage credit scheme expires, and you will have happy workers and a healthy bottom line, not to mention employees who understand how they impact the business and have a stake in business performance.

Productivity Gain Sharing

Let’s go back to the statement posted on the IRAS website and stated by the Finance Minister that WCS “aims to support productivity gain sharing between employers and employees through meaningful wage increases, especially for lower wage workers.” Did you know that there is a type of incentive compensation approach called productivity gainsharing, used by many employers in the U.S. and certain other developed countries?

Gainsharing schemes reward employees for achieving set production or service goals based on a predetermined formula. The underlying assumptions are that 1) employees can be educated on how their ideas and/or efforts impact productivity, and 2) those employees can be motivated to increase their efforts and come up with new ideas, if you share a portion of productivity gains using a transparent, predetermined formula.

According to a 1992 study by the American Compensation Association (now WorldatWork), “Capitalizing on Human Assets”, companies with gainsharing plans that could measure the returns experienced a 129 percent net return to the company, and provided an average gain per employee of $2,271 per year. One company reported that for every dollar paid to employees through their gainsharing program, the company gained $3.50. Done well, a gainsharing plan can be a win-win situation for the employer and employees. Gainsharing plans were popular in the U.S. during the 1990’s, but some companies have abandoned them because U.S. overtime pay rules require the gainsharing payments to be included in overtime calculations, creating an administrative burden.

Innovation

Sharing productivity gains with employees is moot (irrelevant) if there are no productivity gains to share. What I am saying is, don’t bother thinking about a fancy new incentive scheme until you have first figured out how to achieve productivity gains. Simply incenting people to be productive will have little effect if they cannot innovate.

Productivity gains require innovation, and this is why the Finance Minister’s speech was brilliant, in my opinion. Productivity and innovation are directly linked. The gains generally happen when people work “smarter”, not just harder. Innovations ranging from the printing press, Henry Ford’s automobile assembly line, free face-to-face long-distance conversations using Skype, or buying music through the internet have radically changed the world we live in, enabling things to happen faster, cheaper, better. Innovation is doing something differently.

Why is it that so much innovation happens in Silicon Valley, or other high-tech centres around the world? It is linked only to venture capital? No. Innovation is about selecting and managing bright people in a way that fosters creative thinking, rewards risk-taking and gets people outside the proverbial box.

Apple founder Steve Jobs, once challenged an employee to speed up the boot times on the Macintosh computer, explaining that the time saved, when multiplied by millions of computer users, added up to several lifetimes, so speeding it up would literally save lives… It worked. A few weeks later, the engineer had cut 28 seconds off the boot time. Jobs said that “by expecting great things” from people, “you can get them to do great things.” (Read the book Steve Jobs, by Walter Isaacson, it’s fantastic if you want to understand innovation.)

Fostering Innovation through Good HR Management

Once you’ve hired smart, creative people, remove the barriers to creativity and innovation, such as:

  • a culture where only the boss can get credit for the good ideas
  • meetings where people don’t speak up until the boss’s views are known
  • job titles and structures that have so many levels one person is twelve levels above another person working on the same problem, creating a false notion that one person is sooooooo much smarter than the other
  • paying people for time worked, not for value delivered (more on this later)
  • promoting technically smart people to be people managers, even though they don’t know how to manage people well (this is called the “Peter Principle”, look it up!)
  • punishing mistakes rather than learning from them and adjusting

So, you need innovation to achieve productivity gains, and you need to select, manage and compensate people in a way that they constantly challenge themselves and each other to find better ways to make and deliver your company’s products and services. It can be done. Hiring graduates who can answer multiple choice questions better than others, and paying them a flat monthly salary and a 13th month bonus is not the way to do it, I’m sorry to say. (I was once in charge of compensation at a high tech company and had the pleasure of visiting our Silicon Valley office where I met the guys who invented Wi-fi and Voice-over-internet-phone or VOIP. Trust me, we did not select these guys on the basis of academics alone, and I did not focus on paying them higher base salaries, but focused instead on variable pay and other types of motivation. And the guy who had the most patents to his name never completed college…)

Focus on a culture that fosters innovation. Innovation, with the right rewards and management practices, will lead to productivity improvement. If you can achieve productivity improvement, you can share those gains with your team.

The Wage Credit Scheme is a very good thing, provided you look ahead, and make plans now to ensure pay increases can be sustained, with your employees themselves being the ones who create more and more value for your customers, for your owners and for themselves.

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