The Water Pepper Project

Porsches in the Parking Lot: Singapore's Govt Pay Spike

2007-04-11T11:07:00.000-05:00

So the New York Times finally picked up on the recently announced increase in Singaporean Ministers' salaries. Even in Manhattan where multi- and mega-million dollar paychecks are commonplace, it raised quite a number of eyebrows amongst friends and colleagues in the Big Apple. Undoubtedly it will also create some waves in public administrations around the world.

The whole saga around the pay increase has already been debated ad nauseum within Singapore and sentiment seems overwhelmingly critical. Like most Singaporeans, I agree that there is a good rationale for ensuring that senior administrators are compensated justly and well. This increase however, seems to go well beyond that. It creates a massive govt-people pay disparity at a time when many Singaporeans are facing deflationary pressures on their take-home pay with recent measures resulting in the influx of foreign ‘talent’ at what seems to be entry- and mid-level management positions (in addition, the cost of living in Singapore is only likely to go up with the increase in housing prices and longer term inflation in food/fuel costs, which compresses real take-home discretionary spending power even more).

I was curious about how the new pay hike was reached and found an article in Channel NewsAsia describing the methodology on a relatively general level. To recap, the article stated “the salaries of Singapore's Ministers and administrative officers are benchmarked against the top earners in six professions. These are bankers, lawyers, engineers, accountants, local manufacturers and employees of multi-national corporations”, it further stated, “the Public Service Division said these are some of the occupations that Singapore's top civil servants could have joined.” In addition, “there are two benchmarks that are being used. For the most senior Permanent Secretaries, the top eight earners in six professions are first identified. That makes a group of 48 persons. This group is then sorted out according to their income. After the middle-income earner is picked out, that person's income is multiplied by two-thirds.”

Here is where some red flags are raised.

Firstly, what exactly does “could have joined” mean? That they could have joined those professions when they elected to go into public service years ago? Or does it mean that they could just simply leave their current civil service positions, head to a top bank or law firm or corporation, and not just get a good job there but get the top position in those organizations (since the benchmarks do refer to the top earners)?

If it refers to the former, it smacks of attempting to eat the fruits of a path not taken which in the real world is absurd. We all have stories akin to how someone ‘could have joined’ pre-IPO Google, ‘could have’ gone into the legal profession, ‘could have’ been accepted to a Stanford or Cambridge, ‘could have’ scored the winning goal in a football match, etc. But such perspectives are irrelevant because we live with our decisions in the present, not in retrospective what-if fantasyland.

If the latter, it makes a massive presumption about qualifications and skills. While most people generally regard most senior Singaporean government officials relatively positively, it is difficult to conceptualize a scenario where top-tier private organizations would suddenly make them the head executive, especially if they have little leverage-able, recent or direct experience. I can see them being consultants, Board directors and even one of several/many other senior executives, etc. But the top earner? Which almost always equate to the CEO? That’s probably a massive stretch.

Secondly, the selection of the six professions raises concerns about outliers. Two professions in particular stand out – bankers and lawyers. Without the benefit of the actual survey or sample which was used in the study, I can only comment using anecdotal references. Finance professionals, especially investment bankers, and corporate lawyers have been making record earnings recently in large part because the global and regional economies have been very strong in the last 2-3 years, and there have been plentiful financing, capital markets and merger-related activities. It is no different in Wall Street, London or Asia. As such, compensations have been at record highs running into multi- and mega-millions for professionals in those sectors.

But the key question is, will this continue forever? Abolutely not. Having intimate experience and familiarity with the banking and legal professions, the one thing that is consistent is that job security is never a given. When good times are rolling, people will do extremely, almost scandalously well. When times are bad, the word ‘bloodbath’ gets used endlessly, especially in banking. So referencing those sectors on recent data points which are likely at or near the peak of the current cycle is noteworthy and disturbing. When the down cycle begins, the very same top earners of last year could very well earn only a tiny fraction of what he/she earned at the peak, or even be laid off simply because they are considered high cost individuals. One can rationalize that the good ones are at no risk of being let go, which is a view that is unfortunately untrue even for many talented and hardworking individuals in those sectors. Coincidentally, we may actually now be seeing the start of a new round of rationalizations in these sectors which will only accelerate if the global economy continues to slow or turn south. Will those benchmarks be re-pegged when times are less robust and everyone is presumably earning less via bonuses and stock options?

Even the other professions will likley exhibit volatility in wages if the economy slows, especially if stock options are included in their overall compensation.

The govt's counterpoint may be that the formula supposedly only picks the median amongst the group of top earners in the sample basket. However, an objective critic would argue that using the sample relies on an overall group of outliers to begin with since it picks the absolute top earners in the select professions, Thus, the midpoint of outliers would still be a significant outlier compared to even say, the top overall 10th-20th percentile selection of a wider sample.

In addition, due to the inclusion of current presumably peak earnings associated with high beta professions from the banking and legal sectors, one-third of the sample is already skewed and biased upwards.

Also, why only those select six professions? What about academia? That’s one very logical benchmark profession that most senior officials can ease into relatively seamlessly and could be quite valuable at. Even more fodder for doubters.

The framework also seems inherently flawed because even if it is used on an ongoing basis, it will always pick the top earner in each of those professions which will likely be a different set of individuals from year to year. As such it fails to capture elements of job insecurity, immobility, company-specific risks or competition that are all too prevalent in the real world. Civil positions at the senior level would seem to have materially less job risks than that associated with high paying private sector positions. That in and of itself is a major discrepency. To be fair perhaps that may be reflected in the two-thirds discount factor the formula uses.

All in all, I admittedly may not be precisely correct with the methodology or data set which was utilized. However I remain skeptical about the robustness of the process. One can even posit that the whole formulation looks strikingly like an exercise in reverse engineering to rationalize whatever pay increase that’s desired.

I had previously been very supportive of good pay for officials. The concept was originally quite daring but perfectly reasonable. I had hoped to be convinced with this recent round, but I find myself disappointed at best, and appalled at worst.

Grub for the World

2007-04-08T13:41:00.000-05:00

So the U.S. farmer is expected to plant a lot of corn for the 2007-08 farming season (starting Spring 2007) with corn acreage at a record level not seen since WW2. Fairly random factoid, especially for someone who grew up in a non-agrarian urban island state on the other side of the world, far away from the croplands of the American midwest. Yet this development may actually have far ranging effects on everyone across the world, or rather it is symptomatic of the evolution of resources being reallocated globally. And a trend which should even impact a faraway country such as Singapore.

To cut a very very long story short, here's the linkage via a summary chain of events:

1) In the last 2 years, oil has climbed dramatically from US$20+/barrel and has been hovering around US$60/barrel recently (hitting as high as US$70+ last year). Depending on who you talk to, US$55/barrel is the new US$20/barrel of yesteryear. Oil is a depleting resource and in increasing demand not only here in the U.S., but everywhere else including the growing economic behemoths of China and India.

2) Alternative fuels come into play. Ethanol in particular has become a real product response in the U.S. - although still uneconomic without subsidies - for overall gasoline demand as a blend with crude-based gasoline. And ethanol production is expected to continue growing. U.S. policy on ethanol is guided by the goal of reducing reliance on foreign-based energy sources.

3) Corn is one of the key inputs for ethanol. Traditionally, U.S. corn is grown primarily for export to countries such as Japan, Taiwan, etc., and for feedstock into the food industry domestically. With the ethanol sector becoming a major and growing demand driver for corn, exports may be impacted in the long-run unless farm yields can improve dramtically (and there is only a fixed amount of farm acreage in the U.S.), and costs for domestic food producers have spiked.

4) Concurrently, global diets are increasingly larger and more protein-rich. For example, the average Chinese and Indian citizen (those two countries alone account for over 2 billion of the people of the world) is getting wealthier and will increasingly look to more meat-based foods, requiring greater amounts of feedstock for poultry, cattle, hogs, etc.

5) Food costs globally will become more expensive and in many ways, more scarce. Countries such as Brazil, Argentina, Australia, etc. should see a massive boom in agricultural activities to become the new farmlands to the world.

6) Water resources, already a massive constraint globally and a major requirement for increased crop agreage, could become the new commodity for competition.

So many moving pieces but the long-term big picture aspect is there. At the risk of oversimplifying the corresponding factors above, there nevertheless is already tremendous data around the current fuel vs food debate in the U.S. which can also be extended to other critical resources on a more global level. Whether by coincidence, necessity or outright urgency, methinks public policy around the world needs to be geared towards improving our energy and water resources.

For Singapore, some recent moves seem to be in the right direction even if they are not necessarily part of an overall concerted national strategy. However, given the country's resource-deficient position, a strategic policy for the future may be needed. Water is already a life-and-death issue for Singapore, so recent moves on Newater, desalination, etc. are important pieces not just for local purposes, but also to tap into increasing demand for such technologies and expertise abroad. As for food costs, material inflation should undeniably kick in in the near future and is a factor policymakers may have to seriously (re)consider when weighing policies that will impact the lower and middle income.

Introduction to the Water Pepper Project

2007-04-08T12:40:00.002-05:00

What's a water pepper, the name of this blog? Really, nothing fancy. The blog name originated from my search recently for a particular type of herb used in laksa, one of my favorite Singaporean dishes. When dried and added to the curry-like broth, the laksa leaf provides a wonderful enhancement. Of course, one cannot simply find dried laksa leaves in stores outside Singapore... even in the well established ethnic speciality markets. Some quick research online revealed that the laksa leaf plant is known by its scientific name as polygonum hydropiper, or more commonly as the water pepper. The name sounds pretty simple yet interesting and neutral. Plus it recalls that simple venture of mine to find a culinary element of Singapore in a foreign land.