Business Times, Thursday May 31, 1990

The Bottom Line

Dish out premium pay, but on a more flexible basis

THE NEW NWC guideline of built-in increases not exceeding productivity growth is generally well received as it excludes the variable bonus. However, companies which have to pay more due to exceptional circumstances are advised to pay as much of the increase as possible in a variable form.

Though the NWC did not specify exactly what these exceptional payments are, they must surely include market premium allowances or adjustments paid to cope with the current tight labour market.

Recently, some companies experienced high labour turnover on account of the labour situation and, in response, had to pay high wages for replacement staff. In a few cases the replacement wages were more than 20 per cent above the previous levels. Unfortunately, most of them paid the entire portion of the increased wages in the form of basic wages. When asked why they did not pay part of the increases in a variable form such as a monthly variable component (MVC), the usual answer was that it was too messy or that they knew of no company doing it.

Now that the NWC is encouraging more variable pay for such exceptional circumstances, more companies hopefully will adopt the flexi-wage approach. I suspect many companies do not even acknowledge the market adjustment factor as such and, as a result, pay high annual wage increases in lieu of this.

Paying flexible and selective market adjustments can certainly help to moderate the built-in wage increases. To illustrate how this can be done, I cite the example of a medium-sized marketing and distribution company which recently used a flexi-wage approach to help solve their problem.

During the recruitment for a new sales manager, the company discovered that the tight labour market was “creating” a premium of about 10 to 20 per cent in salary for the position. The best candidate, however, asked for 40 per cent more, but after some negotiation appeared willing to accept 30 per cent.

In a counter-offer, the company offered 20 per cent more in base pay and another 15 per cent in the form of an MVC. The MVC was to serve as the market premium allowance to be paid monthly. However, it was semi-guaranteed in the sense that in a severe industry downturn or if the company were to lose money, the amount of the MVC would be reviewed and reduced if necessary. The candidate was initially surprised at the counter-offer but eventually accepted it, presumably after satisfying himself that the extra 5 per cent offered over his asking salary was worth the added “risk”.

The company acknowledged that the arrangement was somewhat complex but it felt the flexibility justified it. Thus, instead of paying the 30 per cent increase in out-right base pay, the fixed cost increase was now 20 per cent. That was not the end. In order to prevent a high turnover and also to maintain internal consistency and fairness, the personnel manager and the MD then had to decide whether the rest of the sales and other support staff should have their salaries adjusted and by how much.

After a brief survey of the appropriate labour segments, the personnel manager recommended an average 10 per cent adjustment in the form of a similar MVC to only the sales staff. For the other support staff the problem was not deemed acute enough to require an immediate adjustment. The MVC amounts that were subsequently paid to the other sales staff varied from 5 to 15 per cent of base salary.

The practice of paying market premium allowances is not new. Airlines have been doing it for their pilots for years, and over the last five years some companies here have also been doing it for their computer professionals and foreign exchange dealers. The MVC is not new either. It was the Singapore government in fact which first used the principle when, following the 1985 recession, it converted the cumulative NWC adjustments into the MVC.

Every company, of course, has to evaluate and decide the optimum set of actions to take. What is clear is that if a company takes the easy way out and pays everything the market “dictates” in the form of base pay, it may not only be giving the wrong signals but it may also make things more difficult for the future.

The market premium allowance is subject to market forces no less volatile than those affecting the variable performance bonus. Wages should reflect this reality, and market adjustment paid as a monthly variable component is one way of doing it.

Peter Lee runs his own consulting company
Peter Lee and Associates, and
specialises in remuneration and related assignments.