Background
1. In 1987, the Wage Reform Committee introduced a flexible
wage system that enables companies to reward employees and to
adjust wage costs in line with business performance. It also
recommended that the annual variable component should constitute
20% of total wages. By 1998, the annual variable component had
built up to about 16% of total wages in the private sector.
The economic recession in 1998 has shown that while our wage
system is flexible in allowing companies to link performance
to rewards, it is not flexible enough to enable them to make
quick adjustments to their wage costs in the event of a sudden
and sharp business downturn. To further enhance the flexibility
of our wage system, the National Wages Council recommended that
a monthly variable component (MVC) be introduced.
The MVC should come from part of the wage increase. The percentage
of the wage increase to be set aside as MVC would be determined
by employers in consultation with unions.
To be an effective mechanism for wage adjustment in a sudden
business downturn, the MVC should be built up progressively
to form about 10% of total wages. Over time the present 80:20
flexible wage structure could evolve into a wage structure of
70:10:20 representing basic wage, monthly variable and annual
variable components respectively.
With the MVC in place, companies will be able to adjust wage
costs to help remain viable and save jobs for employees in times
of sudden business downturn when companies’ viability are severely
undermined. It also means that we could minimise the need to
cut CPF contributions which employees would depend on to service
mortgage repayments as well as for medical and old age needs.
"We should begin to build up the
MVC once companies start paying wage increases. This is the
right time to do so. The flexible wage system has just undergone
its first major test and its effectiveness and limitations are
still fresh in people’s minds. Also the economy is doing well
and wages are rising. In the same way we built up the annual
variable bonuses after the 1985 recession, it will take several
years to build up a significant MVC of say 10%. If we do not
start now, we will miss a rare opportunity to do so."
DPM BG
Lee Hsien Loong Inaugural National
Manpower Summit
29 September 1999
Key Principles
An effective MVC scheme must be guided by the following principles:
A good-sized buffer
The MVC should form a significant share of the monthly wages
to add to the flexibility of the annual variable component.
While there are certain jobs where the current monthly and
annual variable components are not in line with the 70:10:20
wage structure, companies should as far as possible work
towards the recommended structure.
Simple to administer
Where the MVC percentage is different among employees, the
system will be complicated and costly to administer. It
would hence be ideal if MVC could be built up at the same
pace for all employees in the company. This could have the
following advantages:
It would be easier to administer over the years;
It enables employers to implement an across-the -board
reduction in MVC; and
It would convey a sense of equity.
Responsive
Companies and their unions should formulate and agree on
a set of clear criteria that enables MVC to be adjusted
quickly in time of need. The criteria should be pre-agreed
and determined before the ‘crisis’. Trying to set criteria
for reduction at the point of ‘crisis’ may be too late.
The criteria must have enough safeguards for the wages of
the employees while giving employers the flexibility they
need.
Applies to all levels of employees
The MVC should as far as possible apply to all levels of
employees - management, executive and rank-and-file - whether
unionised or not.
Must not add to wage costs and erode competitiveness
The MVC should be built up from wage increases which are
affordable by companies, taking into account performance
and productivity increases.
Operational Details
Timing
Companies should start to build up the MVC component as soon
as they are able to award wage increases. To date, some 300
companies have implemented the MVC and the average amount set
aside is about 2% of the monthly wages.
Pace
Companies with the base-up wage system would find it easier
to integrate the MVC into their salary system. The base-up wage
system provides for salary ranges which better reflect the value
of the job and closely links wage increases to productivity
growth. Accordingly, companies are advised to adopt the base-up
wage system so that the MVC could be more smoothly implemented.
The percentage of MVC build-up should be the same for all employees.
Companies will have to deal with a very complex salary management
system if the pace of building up the MVC varies from employee
to employee.
New entrants
For easy administration and to ensure that the same pace of
MVC build-up among all employees is achieved, new entrants to
a company where existing employees are already on the MVC should
have their MVC calibrated into the offered salary. For companies
which have implemented the base-up wage system, the problem
of MVC calibration for new employees will not arise. For companies
not on the base-up wage system, the MVC would progressively
become a bigger component of the minimum salary of the range,
until it reaches the target rate. This, however, should not
be perceived as reducing the minimum salary. Rather, it should
be viewed as a way to ensure that new entrants into the company
would start off on the same footing as existing employees. Some
companies may resist adjusting the starting pay thinking that
it is one way to save on starting wages. This may not be advisable
as the salary for new job entrants is determined by the condition
of the labour market and adjustment is often needed. If a company
does not make regular salary revision, it would have to make
significant adjustments to their starting salary sometime in
the future and this would lead to consequential adjustment to
the salary of existing employees, in order to maintain relativity.
Employees on top of the scale
The same problem would exist for employees at the top of the
scale in companies which have yet to implement the base-up wage
system. For such companies, the management and union should
work closely to explore how to build up the MVC for such employees,
taking into account the key principles. Such companies, however,
will face the same complications as those which do not adjust
the starting pay regularly. In fact, the majority of companies
have made regular adjustments to the minimum and maximum salaries
of the salary ranges as a result of changing job requirements
and the improved skills and productivity of their employees.
Between the years 1990 and 1998, the minima of selected occupational
groups were adjusted by between 3.9 % to 5.2 % per annum. During
the same period, their maxima were adjusted by between 3.1%
to 5.6 % per annum. Companies should upgrade the skills and
capability of these employees so that they can contribute further
to the performance of the company. Such employees must also
be willing to be retrained or be deployed to where they can
continue to add value to the operations of the company.For these
reasons and for the purpose of enabling the company to reduce
the MVC uniformly and responsively, companies should implement
the base-up wage system without delay.
Employees on Fized ANnual Increments
Some companies have entered into agreement with their unions
on fixed annual increments applicable for several years. In
such cases, employers and their unions could negotiate to set
aside part of the future fixed annual increments to build up
the MVC. In companies that practise NWC "top-up" payments,
such payments could also be used to build up MVC.
Criteria For MVC Adjustments
For greater responsiveness, there should be clear indicators
for initiating discussions with the unions on the need
to manage wage costs;
for implementing a cut in the MVC; and
for restoring the MVC.
Process for Initiating the use of MVC
Indicators for MVC adjustment can only be qualitative at the
industry level and should be quantitative at the enterprise
level. This is because the application of the MVC is company
specific and should therefore be tailored to the need of different
businesses and circumstances of each company. Some of the following
indicators (which are by no means comprehensive or prescriptive)
could be considered by companies in various industries:
Electronics
Orders, book to bill ratios, utilisation/ production capacity
Hotels
Tourist arrivals, occupancy rate, gross operating profit as
percent of gross operating revenue, room rates
Financial Services
Profitability
Retail, Sales and Services
Sales, profitability
Construction
Contract value, property indices, profitability
Transport & Logistics
Passenger load factor, yield, cargo load factor
Each company, together with its union, should decide on its
own group of indicators and quantify them so as to determine
the extent of and the timing for MVC adjustment. More importantly,
the criteria should be agreed upon before a ‘crisis’
occurs, and not when the ‘crisis’ happens.Where necessary,
employers and unions may approach MOM, SNEF and NTUC for advice.In
the event of the need to cut the MVC, it is recommended that:
Management leads by example. This could mean earlier
and/or bigger cuts in their MVC or basic wages. Leadership
by example would serve as a strong proxy indicator for
the need to cut the MVC of employees. This was clearly
demonstrated in the 1998 recession. Where management had
led by example, companies found it easier to implement
wage reduction.
Management informs and updates employees, as appropriate,
of the sequence of measures taken to reduce non-wage and
wage costs, prior to initiating discussions on the MVC cut.
This will prepare employees and enable them to understand
the rationale for MVC cut as an appropriate measure to address
the deteriorating business condition.
Rebuilding of The MVC
The MVC should be rebuilt in line with the subsequent performance
of the company. While the pace and rate of rebuilding should
depend on each company’s cost competitiveness, it is in
the interests of both employers and employees to rebuild the
MVC as soon as possible.
Conclusion
Companies and their unions are urged to implement the base-up
wage system as soon as possible to enable the MVC to be built
up. Having a MVC would introduce additional flexibility to our
wage system and enable companies to adjust their wage costs
more readily in a severe business downturn. This would help
companies to stay viable and sustain employment.
Frequently Asked Questions
Is MVC considered as part of the basic rate of pay?
As MVC is built up from annual wage increases, it should
form part of the basic rate of pay and hence should attract
overtime payment, allowances, CPF contributions, etc. The
MVC should be viewed as a "standby component"
to be drawn down only in time of sharp business downturn.
How should the MVC be built up?
In their wage negotiations, union and management should
determine an appropriate portion from the annual wage increase
to be set aside as MVC.
Can the MVC be implemented with the base-up wage system?
Yes. For easy administration of a wage system, it is recommended
that companies implement the base-up wage system together
with the MVC. The base-up wage system helps to ensure that
wages closely reflect the value of the job and reward workers
based on their contributions. In the case of MVC, it provides
the companies with an added flexibility and responsiveness
when they encounter severe financial difficulties. The two
reinforce each other to help ensure that wage increases
are closely linked to productivity and profitability, and
yet allows for flexibility.
Should MVC be set aside as a percentage or a dollar
quantum?
It is recommended that MVC be identified as a percentage
of basic salary so that the ratio between MVC and basic
salary can remain constant despite salary changes in subsequent
years. A constant ratio would make the administration of
MVC much easier. This arrangement is different from that
of fixing MVC as a dollar quantum. If MVC is fixed as a
dollar quantum, the ratio between MVC and basic salary would
be lowered as basic salary increases. The employer would
then have to make periodic adjustments to the quantum of
MVC in order to maintain it at a fixed percentage of the
employees’ monthly wages. It would therefore be advisable
to implement the MVC in the form of a percentage instead
of a dollar quantum.
An example of a company building its MVC to 5% of wages
is shown below:
Year
AI
Base Salary
New Salary
MVC
Y1
5%
$1000
$1050
3% od ($31.50)
Y2
5%
$1050
$1102.50
5% of $1102.50 ($55.13)
Y3
2%
$1102.50
$1124.55
5% of $1124.55 ($56.23)
Y4
Freeze
$1124.55
$1068.32 after MVC cut
Nil
If the annual increment is given in the form of a
dollar quantum, would a company still be able to implement
MVC?
While it would be easier to implement the MVC in the form
of a percentage, company could still implement the MVC by
means of a dollar quantum if they so decide. They could
compute and convert the MVC dollar quantum into a percentage.
If annual increment is given as a dollar quantum, MVC could
be computed as a percentage of basic salary.
Can a company choose to build up MVC to only 5%, instead
of the recommended 10%?
The desirable percentage should be determined taking into
account the needs and objectives of the company. However,
it should constitute a significant portion of monthly wages
so that when a wage cut is implemented, it could help the
company to lower their operating cost substantially and
to save jobs.
The appropriate quantum as recommended in 1999 by the National
Wages Council is 10% of basic salary. This would help companies
to evolve a wage structure comprising 70% basic wage, 10%
MVC and 20% annual variable component.
Can the MVC for future years be pre-determined?
Since the MVC is built up from future wage increases, it
should be negotiated yearly, taking into consideration due
wage increase for the year. Hence, unless wage increase
has been fixed for future years, MVC should not be pre-determined
for the future years.
How does a company implement MVC for new staff and
those at the maximum salary?
For new employees joining a company where existing employees
have already built up the MVC, the management should calibrate
the MVC into their starting salary. This is to ensure that
all employees have the same percentage of their wages as
the MVC at any point of time. If the MVC for new employees
are built up from future wage increases, there will be many
cohorts of new employees with different percentage of MVC
in the company. This will be administratively cumbersome.
Management should, however, note that if the starting salary
is not adjusted, the MVC will eventually constitute a larger
proportion of a new entrants’ basic salary.
For those at the maximum point of salary, management should
build up the MVC from wage increases, which are awarded
to them, either at the time of salary revisions or through
the base-up wage adjustment.
Can a company effect MVC cut for certain categories
of employees only?
It would be advisable for management to effect the MVC cut
across the board to ensure equity in implementation. However,
the company can cut the MVC of managerial and executive
staff first, based on the principle of management leading
by example.
Under what circumstances could a MVC cut be effected
after it is built-up?
Companies should develop a set of indicators for triggering
MVC cut. These indicators should be made known to employees
so that they could readily accept the cut when it is activated.
The indicators could vary from company to company depending
on the nature of their business operations.
Examples of indicators could include declining orders, sales
and profitability. Before the management effects a cut in
MVC, they should share relevant information with their employees
including measures adopted or to be taken to reduce non-wage
cost items (eg. reduction in overtime, freeze recruitment,
shorter workweek, etc).
In what order should wages be cut and rebuilt?
In bad times, the order of the cut should be - annual variable
payment, MVC, AWS and basic wage. During good years, MVC
should be rebuilt progressively in the following order -
basic wage (back to market level), MVC and then annual variable
payment.
However, depending on economic and company performance and
timing, there may be situations where it is appropriate
for the MVC to be cut first.
If a company retrenches workers after reducing the
MVC component, should the retrenchment benefit be payable
based on the last drawn salary before or after the MVC cut?
Workers’ retrenchment compensation should be based
on workers’ salary before the MVC cut as they have
already accepted a reduction in total basic wage to help
their companies tide over difficult period.
Industrial Relations Department National Trades Union Congress
NTUC Trade Union House
73 Bras Basah Road
Singapore 189556
Tel: 222 6555
Fax: 334 3373 http://www.ntuc.org.sg
Labour Relations Department Ministry of Manpower
18 Havelock Road
#04-02
Singapore 059764
Tel: 438 5122
Fax: 535 4811 http://www.mom.gov.sg
