Speech at he Mandarin Seminar on Wage Restructuring For Small & Medium Enterprises (SMEs) 2007

Mr Gan Kim Yong, Minister of State For Education , Manpower, SMU Conference Hall

Mr. Thomas Chua,
Chairman, General Affairs Committee of Singapore Chinese Chamber of Commerce & Industry,

Mr. Lawrence Leow,
President, Association of Small & Medium Enterprises,

Mr Freddy Lam,
Vice-President, International Committee of Singapore Business Federation, Honorary Deputy Treasurer of Singapore National Employers Federation,

Mr Simon Lee,
Council Member, Singapore Manufacturers' Federation

Council Members and Distinguished Guests

Ladies and Gentlemen,

Good morning.

It gives me great pleasure to join you this morning at the Seminar on Wage Restructuring for Small & Medium Enterprises (SMEs).

Need for Flexible Wage System

2.   With globalisation, intense competition from emerging economies and shorter business cycles, the business environment has become more volatile and more challenging. To survive the intense competition and to seize new opportunities, companies need to be nimble and responsive in managing the rapidly changing business conditions. In this regard, it is essential for companies to adopt a wage system that is flexible and one that closely links rewards with the performance of both the company as well as the individual. With a flexible and performance-based wage system, companies can adjust their wage cost according to business conditions and the company's performance. In good times, companies can reward workers with higher wages and higher bonuses in recognition of their efforts and contributions. In difficult times, companies can also lower the cost of wages to remain viable and to enable workers to keep their jobs.

Features of a Flexible Wage System

3.   The Tripartite Taskforce on Wage Restructuring was set up in 2003 to help companies move to a flexible wage system. The Taskforce made the following recommendations to implement a more flexible wage system:

a) Introduce Annual Variable Component, or AVC, linked to key performance indicators (KPIs) so that rewards can be tied to the performance of both the company and the individual;

b) Introduce  Monthly Variable Component, or MVC, that allows companies to make quick adjustments to cost when the company is facing a severe business downturn to save jobs for workers;

c) Reduce the Maximum-Minimum salary ratio to an average of 1.5 or less so as to better reflect the value of the job and to ensure that workers are rewarded based on their contributions, thereby moving away from the seniority-based wage system.

Progress of Wage Restructuring

4.   Following the Tripartite Taskforce's recommendations, the tripartite partners have been actively promoting and facilitating the implementation of the flexible and performance-based wage system. Seminars, briefings and workshops for employers and unions have been organised to promote the adoption of the flexible wage system. In addition, consultancy and assistance were provided to companies to restructure their wage systems. Guide books and flyers have also been produced and distributed to help them.

5.   Good progress has been made. As of December 2006, 83% of the Singapore's workforce is under some form of flexible wage scheme, with at least one of the three key recommendations incorporated in their wage structures. The take-up rate for large companies employing at least 200 workers is higher at 90%. For SMEs¹, it is at 73% and this represents a notable improvement from 68% a year ago and 63% in 2004.

6.   About half of the workforce (46%) have at least 2 key recommendations incorporated into their wage structures. This included 60% of employees in the large companies and 26% of employees in SMEs. SMEs can do more to move towards flexible and performance-based wage system.

7.   It is encouraging to note that many SMEs do see the merits of narrowing the Maximum-Minimum salary ratio to better reflect the value of the job and move away from the seniority based wage system. As of December 2006, 57.5% of SMEs have reduced the Maximum-Minimum salary ratio to 1.5. 31.5% of the SMEs now link the Annual Wage Component payment to KPIs. However, the progress among the SMEs is slower in implementing the Monthly Variable Component, with only 16.5% of the workforce adopting it.

8.   Noting the slower pace of adoption of the MVC among SMEs, the National Wages Council (NWC) in its wage guidelines for 2007-2008, emphasised the importance for companies to introduce or build up the MVC, so that they can be more responsive to changing business conditions in future. With the strong economic growth, companies are now adjusting their wages to attract and retain workers. This provides good opportunities for companies to use the wage increase to build up the MVC.

Case examples

9.   In the past two recessions, many companies including SMEs relied on CPF cuts to reduce wage costs to remain viable. However, companies cannot depend on the government to mandate CPF cuts to reduce business costs. It is therefore crucial for companies to incorporate into their wage structure the MVC so that wage costs can be managed flexibly to respond to a fast changing business environment.

10.   At the height of the SARS crisis in 2003, many companies benefited from having the MVC in their wage structure. This morning I will share with you a few examples.

11.   Singapore Aero Engine Services Pte Ltd first introduced the MVC in 2002 and increased it to 7% in 2003. When SARS hit Singapore, the company's business was adversely affected as the air travel industry went into a downward spiral. The management decided on a MVC cut of 4% in May 2003. A further 3% cut was implemented in July that year. This helped the company to reduce its wage costs quickly and enhance its cost competitiveness. By October 2003, the business has improved and the company restored the MVC back to 7%. The company also rewarded its employees with a 1 month AWS and a 1.6 months variable bonus at the end of the year. This is an excellent example of how companies can tide over a short-term downturn by adjusting its wage costs through the MVC.

12.   Many companies use annual wage increases to gradually build the MVC to 10% over several years. However, some companies, like Tractors Singapore Limited and Dunlop Singapore, adopt different methods to speed up the build-up of the MVC. In addition to using annual wage increases, these companies also transferred a portion of the basic wages to MVC. Another company, AETOS Security Management Pte Ltd, reclassified 10% of the workers' existing wages as MVC without using the annual wage increases granted by company to individual workers. With the current strong economic growth and good business prospects, it will be easier for companies to introduce the MVC now rather than during an economic downturn. We must seize the opportunity.

Wage Restructuring will help enhance older workers' employability

13.   Besides helping companies better weather the ups and downs of business cycles, a flexible wage system will also help to enhance the employability of older workers and their job security. By moving away from the seniority-based wage system and rewarding workers based on their job worth and performance, the cost competitiveness of older workers will be enhanced and companies will find it more worthwhile to recruit and retain them.

14.   SMEs should also make greater use of the Annual Variable Component (AVC) to link rewards to the company's and individual's performance. By so doing, they could recognise and reward better performance, thereby motivating them to make greater contributions to the company. In this regard, a simple KPI and performance management system can be developed with the support of the Singapore Workforce Development Agency which will provide funding and consultancy on the implementation of a flexible wage system.

Make the Move Now

15.   Today's seminar conducted in Mandarin, is jointly organised by the Singapore Chinese Chamber of Commerce & Industry (SCCCI) and the Ministry of Manpower (MOM). The seminar will allow more SMEs to better understand the rationale and benefits of implementing the flexible wage system and how such systems can be implemented in your organisations. Today we have invited four companies to share with you their experiences. Teckwah Industrial Corporation Ltd and Singapore Cruise Centre Pte Ltd, for example, have worked closely with their unions and implemented all the three key features of a flexible and performance-based wage system. I hope that you will be inspired by their experiences.

16.   MOM has also published a handbook in Chinese to help companies implementing a flexible and performance-based wage system. This has been distributed to all the participants here.

17.   With the volatility of the business environment, there is an urgent need for companies to be more responsive in managing wage costs, and in rewarding and motivating employees. The implementation of the flexible and performance-based wage system will help to address this need. I urge SMEs which have yet to adopt the system to do so quickly. I hope that this seminar will motivate you to restructure your company's wage system and I look forward to seeing more SMEs adopting flexible and performance-based wage systems.

18.   Thank you.