Thursday, May 01, 2008

Pay of leaders

A few days ago, someone passed this question to me, “Do You think our leaders' performance commensurate with their pay?”

It is my policy to avoid commenting on any specific person’s performance and pay, even if this person reports directly to me.

I wish to share my personal views on how corporate and government leaders around the world are rewarded.

The prevailing thinking is that corporate leaders should be rewarded based on the shareholder value that they have created. This approach appears to be wonderful in theory. But it has great difficulty in practice.

The current method of measuring shareholder value based on the share price is flawed. The share price can fluctuate wildly based on many factors that are not related to performance of the corporate leaders.

Corporate leaders like this method because they can get fat bonuses in good years, and are not required to pay back these bonuses during the bad years.

It has contributed to big moral risks. Some corporate leaders manipulate the accounts to show big profits in the early years. Remember Enron and Worldcom? Some others take big risks to boost short term profits. Remember subprime mortgages, hedge funds and special investment vehicles?

These corporate leaders earn unimaginable amounts during the good years. When their companies have to write off billions of dollars of shareholder money in the subsequent years, these leaders depart with golden parachutes.

How should government leaders be paid?

It is important that the rewards should attract the right type of people to take the risk and nature of political life.

Monetary reward is an important factor. But it should not be the sole or dominant factor. A passion for this type of work and life is equally important.

We should attract leaders who have the passion to help improve the living standards of the ordinary people. These leaders are willing to put their interest of the public above their personal interest and give up the bigger rewards of corporate life.

They need to receive an adequate remuneration, so that they do not need to supplement their incomes through corrupt means. A remuneration of 10 to 20 of the average earnings of the population, accompanied by a good pension, should be adequate to give a comfortable life. But it will not put them anywhere near the earnings of top corporate leaders and professionals.

I believe that there are many capable people who are willing to come forward for the satisfaction of serving the people and an adequate remuneration. This will be the best type of people to be in government.

If a country cannot find this type of people, then there must be something seriously wrong with the values of that country!
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12 comments:

Anonymous said...

In Singapore the govt has benchmarked the pay to the topmost earners of the country which makes it extremely high. This becomes another problem in itself because it severely limits the pool of people to select to enter politics. Why? Because the person must be already drawing quite high pay before he enters politcs. If not, he will have a quantum jump in his pay after going into politics which is not so appropriate and politics becomes a get rich path. But such people may make good politicians but were virtually eliminated because they have much lower pay before. Similarly a very highly paid person may be strongly persuaded to join but may not have the aptitude to be a politician. Hence you may end up with a not so suitable group of people in politics. They may be talented professionals or in their respective jobs but not as politicians. Through this, the PAP also has unwitingly consider high pay as a reflection of a person's capability, forgeting that other factors may also play a part in high pay for a person or a profession.
I think this is the biggest problem on leadership renewal in Singapore and this is further complicated by the fact that we are already small and hence an even smaller pool of people to choose from. It is the method and evaluation of values, not so much the values, that is seriously wrong.
And by the way for politics, you cannot simply choose foreign talent like you do for all other areas when there is a shortage.

May 01, 2008 9:04 AM
dsowerg said...

Mr Tan, a very measured and wise response. I agree with you that the "shareholder value" method of reward for corporate readers is flawed. Some of these leaders are on contract and because of this, they have only one objective: to make a pile before their contract ends. So they have very short term views.

There are so many ways (most of which are legitimate) to "cook the books", or they put off necessary expenditure so that the profit will look good. In the end, they leave with a huge pay packet, but the company they left behind is in a worse state, for example because of dubious deals signed or necessary maintenance that had been put off for too long.

As a shareholder and investor, I am learning how to spot unscrupulous leaders like this. It's not easy to spot these people just by reading the financial statements. Attending AGMs is one way but I'm flabbergasted by how some shareholders attend AGMs just to get free food! :)

As for reward for our political leaders... the least said the better. Otherwise you will ban my comment :)

May 01, 2008 10:47 AM
Anonymous said...

In terms of caring, if a minister really wants to help his people, he/she can do something by donating part of his salary to help the needly.

There is a world model - current South Korea president, who donates ALL of his pay!!!

Our govt. keeps saying 'world class something something....' but in this aspect I couldn't find someone who has say a 20% match to his deed. South Korea people are indeed very fortunate.

May 01, 2008 11:27 AM
Anonymous said...

Do you think the current ntuc management is cooking the books? Just like fund managers actively managed the portfolio to improve the result the new management's objective is to be number one in market share at the expense of profit and margin. What is the risk taken? the life fund? the annual bonus?

May 01, 2008 11:35 AM
Anonymous said...

Mr Tan

Well said. Your comments reminded me of the article below:

--------------------------

(Former President of India APJ Abdul Kalam at Wharton India Economic
forum , Philadelphia , March 22,2008)

Question: Could you give an example, from your own experience, of how
leaders should manage failure?

Kalam: Let me tell you about my experience. In 1973 I became the
project director of India 's satellite launch vehicle program,
commonly called the SLV-3. Our goal was to put India 's 'Rohini'
satellite into orbit by 1980. I was given funds and human resources --
but was told clearly that by 1980 we had to launch the satellite into
space. Thousands of people worked together in scientific and technical
teams towards that goal.

By 1979 -- I think the month was August -- we thought we were ready.
As the project director, I went to the control center for the launch.
At four minutes before the satellite launch, the computer began to go
through the checklist of items that needed to be checked. One mi! nute
later, the computer program put the launch on hold; the display showed
that some control components were not in order. My experts -- I had
four or five of them with me -- told me not to worry; they had done
their calculations and there was enough reserve fuel. So I bypassed
the computer, switched to manual mode, and launched the rocket. In the
first stage, everything worked fine. In the second stage, a problem
developed. Instead of the satellite going into orbit, the whole rocket
system plunged into the Bay of Bengal . It was a big failure.

That day, the chairman of the Indian Space Research Organization,
Prof. Satish Dhawan, had called a press conference. The launch was at
7:00 am, and the press conference -- where journalists from around the
world were present -- was at 7:45 am at ISRO's satellite launch range
in Sriharikota [in Andhra Pradesh in southern India ]. Prof. Dhawan,
the leader of the organization, conducted th! e press conference
himself. He took responsibility for the failure -- he said that the
team had worked very hard, but that it needed more technological
support. He assured the media that in another year, the team would
definitely succeed. Now, I was the project director, and it was my
failure, but instead, he took responsibility for the failure as
chairman of the organization.

The next year, in July 1980, we tried again to launch the satellite --
and this time we succeeded. The whole nation was jubilant. Again,
there was a press conference. Prof. Dhawan called me aside and told
me, 'You conduct the press conference today.'
I learned a very important lesson that day. When failure occurred, the
leader of the organization owned that failure. When success came, he
gave it to his team. The best management lesson I have learned did not
come to me from reading a book; it came from that experience.

May 01, 2008 12:12 PM
Anonymous said...

Kin Lian;

patriot hereby thank You for this write-up in response to my post.

I find your opinions here very fair and wise.

Yours truly: patriot.

May 01, 2008 6:08 PM
Wealth Journey said...

This is Capitalism at work.
The able will get the most.

But like what Mr Tan have said, rewards need to be balanced with a moral sense of duty to the shareholders. What I learn in corporate governance is that we want leaders in the ethical and legal quandrant. But somehow, what we see with executive pay seems to be bordering on the line of legal but unethical. Excessive compensation is to the detrimental of the shareholders and the primary objectives of the firm is to maximise shareholder's value and do its corporate social responsibilities.

For the government, why are we emphasizing so much on the salary. Why do we need to draw in talents using top salary? The argument seems flawed that talents are mobile and will move and thus, we need to adquately motivated them to serve in the public sector. What we need to do is introspect and see whether is there something that can be improved within the system to draw talent. Singapore is run like a big corporation, thus, salary becomes the main draw as no one is loyal/patriotric to the corporation. In other countries, top calibre want to serve. They find their calling to contribute back to the society, to their country as city mayor, as ministers, because they want to see good for their country .. they think they can do a good job of it. They are patriotic and they want to help and SALARY is not an issue. They have the passion to serve the public.

To sidetrack a bit, I was talking to my taiwanese friend,a child from a taiwan MNC, about the govt policy that might have allowed too much FT that are actually not value-adding but aimed at increasing the cost-competitiveness of the country. This indirectly have resulted in older workers not being able to find jobs or have to compete with very low-paying FTs who only needs to feed himself and pass the surplus back to his homecountry of lower standard of living. I opined that maybe the govt policy should be tightened.

She was surprised to hear that but instead offered another perspective. That it is unavoidable that this will happen in globalisation as it is happening everywhere in australia, taiwan, malaysia, europe. The substitution of local labour with cheaper foreign labour (even in specialist level). However, the key would be whether the govt have instituted enough SOCIAL/WELFARE policies to help the population in times of needs and defray their cost as much as possible.

For example, taiwanese govt have a very comprehensive medical care program for all her citizens. The cost of medical is very very low as it is subsidised heavily. She finds singapore's medical expenses ridiculous and wondered how the poor would be able to afford it. At least in taiwan & Australia, the government have entrusted itself to take care of all her citizens who have contributed all their life to the good of the country. But Singapore like to call this welfare states that will become unsustainable. But is it really that way? Have we looked at it seriously? How is it that an insurance company can operate profitably to insure and take care of the ill and sick. Why is it that the govt cannot risk pool effectively with the economy of scale you achieve with 4million in population that are compulsory customers of your medical program?

Maybe it's time we need to relook into the assumption that heavily subsidized medical or any other social/welfare policies are not sustainable for a country like singapore. Has the assumption changed from the time it was looked at (when singapore was still a developing country)... to the present time when singapore is growing with all its might, investing billions into other countries..to generate surpluses that might help to tide singapore over in times of need.. Would it be possible to just take out a tiny 0.5% of the budget allocated in GIC to achieve a program that can help create a sustainable health care system or other social policies?

For this, maybe it's up to the other political parties to add value and suggest alternatives ... instead of just critisizing the government. Sadly.. the other political parties are lacking in substance and I would not entrust my future with them.

May 01, 2008 6:28 PM
Anonymous said...

To enter politics a leader must have passion. He wants to shape the destiny of the country and improve the lives and standard of living of people. He also wants to have a place in history of good things he has done for the country and people.

May 01, 2008 9:32 PM
Anonymous said...

Dear Mr Tan,

I just want to say I have benefited greatly from all the financial advice you have given.

Would you consider running for govt? :)

May 02, 2008 8:38 PM
Anonymous said...

In my view, the government should not set the benchmark by themselves for their own performance, but should delegate this important task to a neutral party, comprising ordinary citizens. Becos critical issues, such as the protection and welfare of the citizens should really be at the top of their performance benchmark as these are the foremost things and priorities that they were supposed to look after, and the sole reason that they were voted in. Not surveys from international rating agencies, not the better of the boom and bust cycle or any other agendas that they like. Just my view.

May 03, 2008 1:41 AM
Anonymous said...

Thank you Mr Tan for your balanced views.
I hope that key Shareholders of OCBC and DBS get the chance to read as well - in particular the part on benchmarking the corporate CEO's pay.
I suspect that foreign Executive Search Companies are unfair to Singaporean applicants for the search to place CEO for Singaporean companies- client's arrogrance begets arrogrance.
I further suspect that the "local ginger is not hot" mentality is perpetuated by Singaporeans themselves. So much for local versus foreign talents - it is this sad state of affair which encourages Singaporeans to leave their own shores. Sometimes I worry that you, Mr Tan may also pack up your bags. Sigh.......................

May 03, 2008 8:50 AM
Anonymous said...

I agree with Anonymous; I too sigh often when I read of Singaporeans having to leave for foreign shores to get a job - as in the case of Today's columnist, Tabita's spouse relocating to Hong Kong recently.

Sometimes it may even seem attractive to be 2nd class overseas than 2nd class in one's birth place; pay may not even be the issue, it is economic survival - if I can find work in Indonesia or Myanmar, I will relocate too.

May 09, 2008 11:38 AM

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