|
Introduction to Wage-Restructuring
Why do we restructure our wages?
What are the objectives of Wage Restructuring?
What are the principles of Wage Restructuring?
What should be the role of management?
What criteria can be used to assess whether Wage Restructuring is required?
How do we carry out the Wage Restructuring exercise?
Why do we restructure our wages?
- The current wage system in most companies is predominately seniority based. The seniority wage system has a long salary scale which does not provide for wage increases which is linked to productivity increases. As a result, it would undermine the cost competitiveness of the companies.
- With business and product life cycles getting shorter, companies to remain competitive must improve wage flexibility in the light of the keen global competition from countries like China and India.
- It is even more critical for older workers as they are more vulnerable to retrenchment due to the seniority based wage system.
What are the objectives of Wage Restructuring?
- Wage Restructuring is not a wage cut or a squeeze on workers wages or just having the Monthly Variable Component (MVC). It is about removing rigidities in the wage system like automatic built-in increases which are not linked to company’s business objectives and long salary ranges which do not reflect the market value of the job.
- It is about making wages more flexible and closely linked to company targets or objectives allowing companies to respond more quickly to changes in business conditions.
What are the principles of Wage Restructuring?
The wage system should be based on the following principles:
- Wages should reflect the value of the job.
- The annual wage package should provide a certain amount of stability. The variable components of the annual wage package should be higher for higher income earners.
- Annual wage increases should lag behind productivity growth.
- Small service increment to recognize learning curve for the job.
- Wage restructuring should be for all levels of staff in a company.
What should be the role of management?
- The top management, preferably, the CEO must be involved and spearhead the Wage Restructuring initiative.
- Management must be clear of the business objectives and establish the key performance indicators.
- Management must understand how wages can incentivize workers to achieve business objectives and/or how wages are rigid which will cause problems in cash flow and viability.
- Management must understand the cost structure of the business and the proportion of labour cost to the total operating cost.
- Management must think of ways to grow the business so as to increase it’s market share and revenue.
- There must be sound understanding of the basic principles of different salary terminologies and its implications (i.e. The difference between Annual Increment, Merit Increment, Wage Increase due to Productivity gains e.g. NWC increment and Monthly Variable Component) Please see salary charts in Appendix A.
- There must be consensus between management and workers that the wage system is a fair one which aims to achieve the company’s business objectives.
What criteria can be used to assess whether Wage Restructuring is required?
Efforts should be focused on companies where the impact of Wage Restructuring to save jobs would be greater. The following are some questions that can be used by unions to assess their branches or companies whether wage restructuring should be embarked.
- Estimated amount the company has or plans to invest in Singapore?
- What proportion of the jobs in the company can easily be relocated elsewhere?
- What is the growth potential of the industry the company is in? Is it a growth or declining industry?
- How much autonomy does the local management in Singapore have in deciding on wage policies and structures? Is it all dictated by Head Office overseas?
How do we carry out the Wage Restructuring exercise?
There are 8 basic steps to kick start the Wage Restructuring exercise. To help facilitate the process of Wage Restructuring, there are tools to assist us carry out the exercise. Templates can be used as a guide to document the steps involved. (See Appendix B1-B4)
- Step 1: Companies must know what it wants to achieve and what its cost components are i.e. what is its fixed cost, its variable cost and how much of total cost is wage cost. An understanding of the cost structure would help unions understand the efficiency or inefficiency of the company and where to focus the restructuring.
- Step 2: Companies should choose fair and reasonable Key Performance Indicators (KPIs) that will measure whether it is achieving its business objective. The choice of KPI is not negotiable. However, how payment should be linked to the KPI should be subjected to union management negotiation. The proposals should state clearly the business objectives and should be clearly explained to the unions, and easy for the workers to understand. Examples of KPIs include: Profit Level, Volume of Sales, Market Share, Growth Rate, Return on Equity (ROE), Return on Investment (ROI), Productivity Increases, Economic Value Added (EVA), Yield, Currency Exchange rates. KPIs can include non-monetary targets, such as safety record, innovation projects, customer satisfaction, hygiene standards etc.
Companies which have different strategic business units (SBUs) could work out different KPIs for different SBUs. Suitable models/frameworks could be introduced to address the problem. For example, What percentage of the bonus is due to group performance and/or individual performance? Please refer to Appendix D for article on KPI.
- Step 3: Companies to make a greater part of the pay variable, but retain a sufficient degree of stability in the fixed portion. As a guide, companies should put 70% of wages into basic pay, 20% into annual variable bonuses, and 10% into MVC.
- Step 4: Companies should draw up a formula to link the variable components to the KPI. The formula can include:
- Profit sharing when benchmarks are achieved
- Trigger mechanism for cuts in bonus and/or MVC during business downturns when targets are not achieved (Please see Figure 1 in Appendix A)
- Equitable upside and downside adjustments to the wages
- Review mechanism for the formula in the light of experience over business cycles
Part of the variable pay can also be based on individual performance. A sound and transparent appraisal system will be needed.
- Step 5: Companies to scale down the seniority-based wage system by deciding on the appropriate salary minimum-maximum ratio through job evaluation based on:
- Nature and Scope of the Job
- Knowledge, skills and experience required
- Complexity of duties and learning curve
- Level of accountabilities and responsibilities
- Level of the jobs in the corporate hierarchy
- Step 6: Narrow salary range by one of the following methods:
- Raising the salary minimum and maximum by the same dollar quantum
- Adjusting the salary minimum by a higher % or quantum than salary maximum
- Raising the salary minimum but capping the maximum with a once-off lump sum in lieu of build-in increment
- Reducing long salary range into 2-3 shorter ranges
- Reducing the maximum points of salary ranges and converting the excess of the desirable salary ratio into:
- Personal to holder basis
- Variable Component if company faces severe cost-competitive problems, long term viability and job securities issues which can be:
- Granted as a yearly/ half yearly/ quarterly component based on performance; or
- Over a period of time; or
- Part variable component, part converted into MVC
- To work towards the desired minimum-maximum ratio, with 1.5:1 as the average or value of the job and the learning curve.
- Step 7: Companies to give annual increments in sustainable amounts which can consist of 2 components – Productivity and Service Increment. Productivity Increment could be given to workers across the board if company achieves sustainable growth. A small percentage of Service Increment could be given to workers especially in knowledge industries. But overall increase in basic wage should lag productivity growth. The total wage an individual worker receives should reflect the value of his or her job.
- Step 8: Management and union must also take time and make effort to explain to every worker why there is a need for restructuring and how the restructured system works. This is best to have top management (Managing Director or Chief Executive Officer) and union officials to show leadership. A good follow-up practice that management should adopt is regular information sharing on achievement of business objectives with the union, for example on a quarterly basis.
Union and management should work together to try to minimize the impact of wage restructuring on workers e.g. setting up a hardship grant or scheme to help relieve workers’ financial burden that may arise due to restructuring.
Back to Wage Restructuring page 
| 
