Saturday, January 28, 2012

Letter to Prime Minister on Ministerial salaries

Dear PM Lee,

I thank you for having the courage to take the unpopular measure of cutting your colleagues' salaries, including your own. The parliamentary debates have focused on setting the right level of pay to attract good people. My humble opinion is that for our country, it is more important to focus on setting the right incentives than setting the right remuneration amount. It is not only wasteful but even harmful to spend lots of money to attract brilliant people and then drive them with the wrong incentives. The best example to illustrate this point is Wall Street in 2008. Wall Street, with all the money it could throw, attracted the best minds from all over the world. Yet, it failed so spectacularly in 2008. Why? Because the people working on Wall Street were driven with a set of perverse incentives that rewarded them for behaving badly. Many of them took excessive risks because when things turn out well, they scoop up the gains but when things turn out badly, other people pay for their mistakes. In such a system, good people eventually turn bad. The smarter the people, the faster the system is driven into self-destruction because smart people know how to game the system more effectively. The world would have been a safer place in 2008 if Wall Street had hired stupider people.

I had seen how bad incentives made good people turn bad when I was in secondary school. My math teacher was a dedicated teacher. She would give the weaker students remedial lessons during the holidays. I respected her until perverse incentives made her behave badly. It came after the Ministry of  Education introduced school ranking. To get her promotion, she pressured the weaker students to drop Additional Mathematics because weak students will pull down the average and affect the school ranking. Things got so bad that one of the parents went to the Math Head of Department and threatened to report this matter to MOE. The HOD relented. Luckily, he did because the son of this parent later got distinction in 'O' Level A Math to the pride of his father. It is hard to know how many children suffered from such tactics by our educators during that period. I do not blame my teacher. I blame the bad incentives that drove her to behave so badly.

In a one-man-one-vote electoral system, it is to the interest of the ruling party to peg their salaries to the masses instead of to a tiny representation of 1000 top income earners (Only 1000 votes, how to stay in power?). The right incentives should drive government servants to serve the masses and not the minority rich because that will result in the maximum number of votes won. Also, the incentives will make a big difference to the thinking and hidden agenda behind the decisions made by policy makers. If salaries are pegged to the top 1000 income earners, their internal biases will be to favor the rich. This will worsen the income-inequality problem which is already a major threat to social stability today.

I hope you would consider pegging Ministerial salaries to a high multiple of the median income of Singaporeans and bonuses pegged to the real inflation-adjusted median income growth. Real median income growth represents rising purchasing power of the people. I think many Singaporeans would not begrudge Ministers' generous bonuses if GDP growth had delivered rising purchasing power to them. Instead, Singapore's strong GDP growth benefited mainly the rich and punished the rest with rising cost of living. How could the people not be angry? There is even a perception among the people that policy makers took the easy way out to grow GDP to hit their own bonus targets by opening the floodgates to foreigners without spending the necessary infrastructural investment to accommodate the enlarged population. Whether right or wrong, perception does matter.

Rising purchasing power means cost of living got to be kept low. I hope the KPIs(Key performance indicators) of government officers would focus more on reducing cost and less on boosting profit. Profits are best left to the private sector. It is not healthy for the public sector to focus on profits because they can simply take the easy way out to raise fees and charges. Worse still, they may even transfer the cost of their mistakes to the public. Since the public services are usually monopolies, there is nothing the people can do. Let us not waste the brainpower in the government and direct them to serve the people by lowering our cost of living. I hope future KPIs will focus on how fees and charges for the people are being brought down through public-sector efficiency and not just profits which can be made from squeezing the people.

How high should the multiple of the median income be? As long as Singaporeans prosper together with Ministers, I think it is fine if Ministers get paid very well. My humble view is that Ministers should be paid as high as possible to attract able leaders but not so high until the people lose respect and trust for our leaders. I think that level has been breached and I thank you once more for taking action to restore some of the lost respect. 失民心者失天下。欲得天下,先得民心。

It is not out of jealousy (too far out of the league to be jealous) that I support cutting Ministerial salaries but out of concern as a citizen that it will harm our country's long-term future. I hope you will forgive me for being brutally honest on this issue.

As you have mentioned in Davos in Jan 2012, Singaporeans and the government have to work together. It is hard to work together if the people no longer trust and respect the government. If there is no respect, unpopular but sensible messages will be lost on the people when delivered by a messenger who is not respected. If there is no trust, new policies will always be interpreted by the people in a bad light (They are just doing this for selfish reasons. Just want to make money for themselves etc).

When salaries are too high, it actually worsens your problem of attracting the best candidates to join you. When the people start to associate politicians with greedy Wall Street bankers, potential candidates who actually want to serve the people will stay out for fear that their own image will be tarnished. This makes it very hard for our country to attract able people from the private sector to come forward. Able people from the private sector usually have to take a pay-cut when they join the government. They will probably join if they are compensated with non-monetary rewards like having a higher standing and respect in the public eye. I think one of the greatest rewards of holding a political office is when strangers thank you and you could genuinely feel the sincerity of their respect for you. It will be better for our country to use the respect commanded by the office to attract able people rather than throw money at them and risk attracting the wrong kind of people.

When salaries are set too high, it is unfair to Ministers who do not need the extra money but want more respect from the people. When annual salary has already exceeded the million dollar mark, that extra hundreds of thousands do not matter anymore. If a public servant says otherwise, then it is dangerous to have him around because he probably has a very expensive lifestyle to maintain. Such a person has a higher risk of falling victim to corruption and bribery. Singaporeans will prefer senior public servants to lead simple lifestyles because these people tend to be incorruptible (that extra money is immaterial because I already have enough). I am glad to learn from your sister's letters to the Straits Times that your family lead a simple lifestyle. Past high Ministerial salaries have unfairly tarnished the image of Ministers who lead simple lifestyles and do not need that much money. I think they would rather trade for more respect than more money. When Ministers don't feel respected, it will surely affect their job performance to a certain extent.

Lastly and ironically, when salaries are too high for senior public servants, they no longer have a stake in the long-term future of Singapore. With globalization, the rich can simply migrate to greener pastures and take their money along with them. It is middle-class people like me who have a bigger stake in the future of Singapore and this is why I am writing this long letter. When public policies take decades to realize their effect, it is important that policy-makers have a long-term stake in the country's future. Otherwise, they will game the system by taking short-term monetary gain at the expense of the long-term good. Earn as much as you can while you can, place low priority on the long-term good because if the country crumbles later, just migrate! It is very hard to set incentives to get people to focus on the long-term because they come and go. Pensions are effective in that regard. Perhaps a return to the pension system would be desirable but you may consider putting a significantly higher percentage of the remuneration into the pension.

I am not sure if you are still reading at this stage. If you are, I sincerely thank you for sacrificing time to read a letter from an insignificant but sincerely concerned citizen of Singapore.