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Pumping in $3.6b to raise wages

It's a huge hongbao to help firms transit to higher wages and higher productivity. But how is the Wage Credit Scheme meant to work? Aaron Low reports.

Pumping in $3.6b to raise wages

WHEN Mr Eric Tan saw the news flash that the Government was going to roll out a multibillion-dollar package to help firms, the first thought he had was: "Wah, shiok ah! (That's great!)"

The boss of real estate consultancy GSK Global says his firm has been suffering from rising rents and wages for the past three years. The package, he says, was a lifeline for small firms like his.

"In other countries, the government would have left firms to die. But this time, they gave us some help, which will even last for a few years," he says, referring to the new Wage Credit Scheme.

The $3.6 billion scheme, which subsidises part of wage increases for Singaporeans for the next three years, is the centrepiece of a $5.9 billion three-year Quality Growth Programme to help tide over companies during the difficult but necessary process of restructuring.

In announcing the programme on Monday in his Budget speech, Deputy Prime Minister Tharman Shanmugaratnam said the country needs to stick to the rocky path of restructuring and that there is no alternative.

What he could offer was to help companies transit and adapt to a new landscape, one where the quality rather than the quantity of growth mattered.

"Businesses will have to restructure in a tight labour market in the coming years, and wages will have to rise," he said.

"Government will provide support to help businesses raise their employees' wages."

Lifeline for companies

THE Wage Credit is, at the heart of it, a wage subsidy, but with a twist. Normally, governments give wage subsidies to encourage firms to hire workers, in a bid to lower the unemployment rate.

Countries which have higher unemployment rates, such as Germany and South Africa, have employed them in the past, accompanied by other measures such as training programmes to raise the skills of workers.

For the Wage Credit, the Government will co-fund 40 per cent of wage increases for Singaporeans earning up to $4,000.

This means that if a worker gets a $100 pay rise this year, the Government will pay his employer $40 a year, for the next three years till 2015.

There is no need for bosses to sign complicated forms, or even apply for the cash: It will be deposited straight into the firm's bank account annually.

The scheme is expected to cover more than half of Singaporean workers here. The median income was $3,480 last year.

The basic objective of the scheme is to give a leg up to firms that are struggling in the restructuring journey.

Firms have had to cope with fast-rising business costs in the past three years.

Wages rose by 8.3 per cent in 2011, and a further 7.1 per cent last year, data from the Manpower Ministry showed.

Ang Mo Kio GRC MP Inderjit Singh says the scheme is a "pro-business one".

"I see this scheme as a costs mitigation scheme. It is more of a pro-business scheme and one way of helping companies cope with the expected higher manpower costs," he says.

The foreign workforce's growth will slow in the coming years and lead to a tight labour market.

This will then mean having to pay more attention to retention of staff, which will mean raising wages, says Mr David Leong, managing director of recruitment firm PeopleWorldwide Consulting.

"Look, companies will have to pay more in wages. Increments are going up, with people complaining about inflation, even though growth is weak," he notes.

"So this will take some pressure off the companies."

GSK Global's Mr Tan agrees. He usually pays 8 per cent in raises a year but will not pass on all of the wage subsidies to the employees. He spent about $600,000 a year on salaries last year. So an 8 per cent salary increase is about $48,000.

This means he could stand to save as much as $19,200 a year, although the final figure is closer to $15,000 as not all of his employees earn less than $4,000.

He will probably pass on, say, about 30 per cent of this to his employees and keep the rest to alleviate the cost pressures.

"I don't think my workers will expect me to give all of it to them. They understand that things have been tight recently," he says.

"Maybe I will use some of the money to do a short trip for the company to raise morale. It's a one-off cost that way."

The other likely effect of the scheme is that it will make Singaporeans slightly more attractive for bosses to hire and retain.

The scheme has to be seen in concert with the other pillars of the Quality Growth Programme, including new productivity initiatives and the tightening of foreign worker numbers.

Foreign worker levies are being raised by an average of between $60 and $150 a month. Mid-skilled S Pass salary requirements will be raised while the Ministry of Manpower has said it will tighten the eligibility criteria for some Employment Passes.

As such, the Wage Credit, combined with these other measures, will "encourage domestic firms to continue to hire Singaporean workers, even as they seek to restructure their operations to become more productive", says Singapore Management University associate professor Davin Chor.

Not a free lunch

BUT firms which simply give raises indiscriminately or use them as a tool to merely retain staff will suffer if they do not raise their productivity to go along with the increased wages.

This is the second leg on which the scheme rests: It is targeted at ensuring that firms raise their productivity as well.

Mr Grahame Wright, partner (human capital) at Ernst & Young Solutions, says firms will be in for a nasty surprise if they simply just use the money for raises.

"Companies that pay additional wages, relying on the 40 per cent credit, but do not address productivity or profitability during this time may suffer come 2016 as they may have higher wage costs without the ability to sustain them," he says.

In other words, there is no free lunch.

National University of Singapore economics professor Basant Kapur notes that with the curbs on foreign workers, wages of locals will rise ahead of productivity increases, thereby imposing cost pressures on firms.

"With the Government providing a 40 per cent subsidy to wage increases for three years, firms will have more time for the productivity improvements they pursue to 'catch up' with wage increases, to the benefit of firms, workers, and the economy as a whole," he says.

Prof Chor adds that local firms need to see this strictly as a "transitional measure, rather than a source of government support that they can rely on indefinitely".

"Otherwise, the intent of the policy to spur such productivity-improving measures would be lost," he notes.

There is also a subtle message in the latest set of announcements: Firms had better start shaping up.

It's been three years since the start of the 10-year restructuring plan and the results have been far from spectacular. Productivity gains have averaged 3.2 per cent over the past three years, above the 2 per cent to 3 per cent target range set by the Government.

But the bulk of that was from the sharp 11.1 per cent gain seen in 2010, an anomaly due to the exceptional 14.8 per cent gross domestic product growth that year.

Productivity is measured by how much more value in dollar terms each worker adds to the economy, so a slow growth rate will affect productivity growth numbers. Ideally, rising productivity would buck the trend of slow growth rates, as each worker would contribute more to the economy.

Last year, productivity fell 2.6 per cent as the economy slowed to 1.3 per cent growth, a worrying sign, given that growth rates are expected to slow in the years ahead.

DBS economist Irvin Seah notes that by the time the three-year period is up, Singapore would be into its fifth year of its restructuring, or just at the halfway point.

"So the Government is telling businesses, We will give you this sweetener to ease the pain but you had better start raising your productivity now because so far, the numbers haven't been all good," he says. "So I expect to see further curbs on top of the ones announced already if things don't improve."

Too blunt a tool?

THE scheme is a flat subsidy, paid out to all locally registered firms that raise the pay of Singaporeans.

As such, it cuts out complications and prevents bosses from having to worry about whether they will get it or whether they need to apply for it.

But its wide application also means that bigger, profitable firms which are not feeling the heat of restructuring will also be getting what amounts to a "freebie", says Mr David Sandison, tax partner at PwC Services.

"Large multinationals and some large local companies which have a significant body of Singaporean employees earning below $4,000 will be obtaining an effective freebie for what might be their normal annual increment to salary," he notes.

Mr Inderjit Singh agrees. He believes the scheme will help the bigger firms more than the small and medium-sized enterprises.

"A more targeted scheme which requires companies to apply based on specific cost mitigation like rentals could have been money better spent," he argues.

And then, there could be some who try to game the system.

For instance, a firm could hire a fresh graduate at say $2,000, when his market rate is actually $3,000.

The company could then give him a raise of $1,000, thereby making the Government pay $400 of the salary it intended to pay anyway.

Bank of America Merrill Lynch economist Chua Hak Bin says there could be abuses but he believes that they will not be widespread.

"Yes, you want to prevent these but at what cost? Micro-managing will only make the programme unwieldy," he says.

"That said, the Government will be on the lookout for such cases to prevent gaming of the system."

Mr Wright adds that such a big national programme is bound to see firms that try to abuse the scheme or even have firms that fall through the cracks.

"What is more important is that firms do not lose focus on the push for productivity. This aids them but they need to raise their game too."

Indeed, firms and business associations have been publicly complaining about the restructuring exercise, going to the extent of saying that productivity targets are unrealistic. Many have also called for help.

The Government has answered their calls for help in a bold and uncompromising fashion, by putting big money on the table in a generous manner.

The ball is now in the companies' court. They need to raise their game, improve their processes and transit into the next phase of growth.

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