There has been great uproar in Singapore about the pay packages of some of our top Civil Servants as well as our Ministers. We would like to join this debate with our usual approach of theory and concepts as analysis tools. But we will focus instead on Civil Servants pay. With regards to Ministers’ pay, we will simply assume that that is a given and that they are top managers/leaders who thoroughly deserve their pay.

Before we kick off our discussion, let us first try to define pay or salary. From an economic perspective, salary is a form of compensation paid by the demander of labour (usually a firm or entrepreneur) for giving up leisure time to work.

It is with this in mind that we add on the management concept of the Disgruntled Workers’ Equation. Actually it should just be the Worker’s Equation, but given this was first introduced when we discussed Disgruntled Workers, let us just leave it as the DW Equation.

You can read about DW Equation in details in my previous article, so I will just reproduce the equation here to continue our discussion.

Pay – Work + Environmental Factors + Job Satisfaction + Future Benefit = Emotion

Using the DW Equation, we can answer the question. Pay is certainly not everything. If you are paid rather averagely but given no work at all, then you have positive emotion (happy). However if you are paid highly but given proportionately too much work to do, then you will have negative emotion (disgruntled).

This is the very simplistic pay-work axis and does not take into account three other factors, the environment, level of job satisfaction and future benefits. Taking into account these three factors, workers can be willing to work for sub-market pay at market work levels if either the environment is good, there is job satisfaction or they can get a better job or higher pay in the future.

So really, pay is just one aspect of the cost and benefit analysis that every rational economic human being applies to the job. Having said all that, I must emphasize that pay is probably the most important aspect as it is the most certain and the most tangible of all the factors. Work levels can change over night and so can environment factors. Job satisfaction is intangible and future benefits need to be actualized for any tangible benefit.

That is why it is quite fair to say that pay is almost everything. But it is also fair to say that other factors can influence the emotion of the worker as well.

So back to our Civil Servants, of course pay matters and is a huge factor. But does that justify paying our top civil servants a couple of hundred thousand a year? In the private sector, to make this amount of money, you either have a huge line or people responsibility or you are one of the huge revenue generators for the company.

To break this down even further, we will have to compare the type of work in the private and public sector. Of course these are generalisations but I will try my best to add to the overall argument. In terms of approach, I think it would be good if we use the Key Management Principles of Objectivity, Measurability, Tradeoff and Implementation Friction. Afterall, the fairest way to compare a public sector manager to that of a private sector manager must be using management principles.

The public sector is basically a bureaucracy. And a bureaucracy means that it is founded on the principles of Rational Authority in the form of laws and rules. So the activities of a manager in the public service is about enforcing the laws and rules of the bureaucracy and over time to improve and update these law and rules. Any massive revolution will be handled by the Minister (who is already assumed to get their top pay here) and so the public service manager is more of a governor than a general.

What is good about laws and rules is that objectivity is very clear. The Manager can clearly outline his objectives for his role. However measurability sometimes suffers because it is not straightforward to measure the outcome or benefit of the policy or action that the Manager has undertakened. Say the Manager proposes a tax subsidy to attract some developments in a certain industry. It is not clear if the outcome was determined by the tax subsidy or by other factors. Also the exact cost versus benefit is not easily analysed both fully and fairly.

Another key point to add is that in the context of most public policy, there is this strong element of tradeoff. Take healthcare for example, either the government decides an extreme of options from a full subsidy to no subsidy. And in between these two extremes are tradeoffs. Of course there is every possibility of being innovative and clever, but from economics, resources are scarce and eventually everything has its own tradeoff. Spending more on defence means less available for other things like education and healthcare. Also raising tax rates will reduce real income and affect consumption among other things.

So really the public sector is about finding the optimal tradeoffs at various levels. It is also most important to note that there is only one government and so it is a monopoly relationship to all the consumers of public service. You cannot file your tax with another department and so you have to accept all the policies and rules with regards to tax filing. Of course in democracies, you can vote out a government at the next election, but before that, the government is basically a monopoly.

For all the law and rules of the public sector, there is only one rule in the private sector and that is make money. Economic Profit is the return to the Entrepreneur or the Company according to Economics. Wait a minute, don’t big companies have rules and laws as well?

I certainly would not deny that big companies are akin to bureaucracies, except that there is a guiding principle of profitability at the end of the day. Yes big companies have rules but they will do whatever it takes to make a good profit margin. That’s the main difference between the public sector and private sector. A company will change its rules if the rules are in the way of its profitability.

Also, the other main difference is this "small" issue of competition. Competition versus monopoly makes a world of difference. When you are a monopoly, being the sole supplier of a product or service means there is no real need to "sell" to the consumer. Consumers just have to line up to pay up if they want to enjoy the utility from that product or service. However when there is competition, not only is profitability affected, but one has to ensure that the consumer is spending on his product and not the advertisers.

So there are the sales and marketing roles of the company. The other roles such as technical or production roles as well as other finance and admin roles support this overall mission of profitability. Measurability is still an issue in some cases, but the idea of profitability simplifies things a lot. Of course performance evaluation is getting more and more complicated these days with various measures and the complications of accounting. But it is much easier to establish and agree on a reasonable basis for good performance.

If you have not already grasps my drift, then perhaps you would appreciate that my earlier description in a way validates the phenomenon on why the public service managers tend not to be as highly paid as the private service managers worldwide. And the reasons are very clear. Measurability leading to attributability is an issue. There is also no real selling and competing to sell to consumers involved. Most people would also prefer to balance tradeoffs than generate profit in the face of competition.

Now that we have frame things in their perspective, we can go back to the DW Equation. If we can agree from the difference between the private sector manager and public sector manager, we can conclude that the public sector manager does less work, but really because his work is "easier" for reasons mentioned above. And not really that he spends less hours in the office. Less here ties more with effort and ingenuity rather than time.

This need to increase pay to retain talents in the civil service to levels that appear quite substantial even to the private sector could according to the DW Equation show some tell tale signs that the other three factors are not quite positive in terms of the overall equation. The exploration of this area is another article in itself but perhaps this should be left to in-house soul searching sessions. This is especially so if the civil service still experiences talent drain after this round of pay increase. Beyond that, the offer curve of labour effect steps in. There is only so much that further pay increases can do.

Of course the increase in wage bill itself is a tradeoff that needs to be managed in how it will be funded and whether there are any social effects. Money leads to envy and even though the increase can be well provided for by other income, the real social opinion and other social effects may linger on after all is said and done.

We should also mention the crowding out effect if the public service monopolises the top talents in Singapore given our limited and shrinking labour force. For Singapore to thrive, we need not just an excellent public sector but an equally excellent private sector.

And last but not least, we have top notch Ministers to lead the civil service. With such top talents, I am sure even second rate civil servants can be turned into top notch ones.

Any opinions or comments ?