Daily Lesson from Life 20 November 2008

"Thu, Nov 20, 2008 my paper Bosses should take wage cut

SENIOR management of companies that need to cut employees' pay should lead by example - by reducing their salaries earlier, or accepting similar or deeper cuts.

This is because 'the principle and spirit of leadership by example should prevail' when the need to trim costs arises, according to guidelines issued yesterday, recommending cost-cutting steps companies can implement during the downturn.


Companies should also maintain close consultations with unions and be transparent.

The guidelines, issued by the Manpower Ministry, Singapore National Employers Federation and the National Trades Union Congress (NTUC), are an updated version of the Tripartite Guidelines on Managing Excess Manpower, launched in 2001.


One measure in the revised guidelines is the Monthly Variable Component, which forms part of the basic pay. It allows firms to adjust wages quickly, without having to wait until the end of the year.

As with the 2001 recommendations, these guidelines urge companies to consider retrenchment only as a last resort. Businesses that have excess manpower as a result of insufficient work are advised to adopt alternatives, such as redeployment, a shorter work week, flexible work schedule or flexible- wage system.

They should also send excess workers for skills training. Said NTUC deputy secretary- general Heng Chee How:
'This economic crisis will test not only the survival instincts of companies and workers, but also their core values.'"

This is a hot topic in Singapore right now. With the economy going into a recession together with some of the world's biggest economies like the USA, Japan, and European Union, anyone who rely on keeping their jobs for livelihood and to pay any financial commitment like car or house mortgages will be under a lot of stress dreading the most feared word: 'Retrenchment!'.

Lessons for me are:

1. back to basic: what is the purpose of a commercial enterprise? The purest form is: to make profit no matter what! How to make profit? By providing products and services that customers willingly spend their money on at prices above the costs of producing, delivering, and maintaining them! Prices will be determined by the market and the perceived value of products and services by the customers while the costs will be by how the companies pay it's workforce, from top executives right down to anyone who contributed to making the products and services possible!;

2. assuming prices are reasonable and can produce profit if costs are reasonable too. In addition, if we assume labour cost is a significant part of the total cost, then it is easy to appreciate that EVERYONE in the value chains should be paid a FIXED salary that are reasonable to provide a decent living standard in the country and a VARIABLE bonuses that will be funded out of the remain of the profit made after deducting money reserved for strategic long term investment and paying the shareholders for their risk capital approved by the shareholders. In this way, the companies can manage their labour costs better!;

3. in fixing the FIXED portion of the reward system, we must not forget the related expenses that accompanied each headcount hired e.g. office furniture and fitting, computer equipment, executive toilets!, business travel (1st class & business class for executives and cattle-class for ordinary employees!), perks, other privileges, etc. A company with an egalitarian value will endeavour to make sure that PEOPLE are fairly and equally treated as much as possible. This also means the leadership also embrace such egalitarian approach to the reward system. Of course, hopefully the FIXED salaries are fixed in such a way that they are transparent and on solid basis that can withstand challenges and scrutinies by anyone who questioned the appropriateness of the formulae.

When the leaders embraced equity as the core values, they will be most likely than any other people to embrace 'sharing of the pains when the chips are down' instead of cutting the rank and file by the hundreds that probably equal to cutting a few of the senior executives!