Dollars & sense

Singapore is now the ninth most expensive location in Asia to live. According to the latest Cost of Living research from compensation specialists, Singapore continues to close in on Hong Kong and top-ranked Chinese locations. Wages here are growing too, and much press has been devoted to some of the pay rises that have been granted since the world economy turned a positive corner. But in many cases, these have been nominal increases only. The real purchasing power of many compensation packages has actually been falling in Singapore – compounding already prevalent retention problems for some organisations.

The local consumer price index – the Government’s key measure of Singapore inflation – rose 3.9% over the 12 months to April 2010. The bulk of the increase can be attributed to transport costs, which rose 13.4% year-on-year. But wages on the other hand increased by a smaller percentage over the same period. After adjusting for inflation, real total wages in 2009 declined by 1%. That’s more money in the pockets of workers around Singapore – but an effective decrease in the purchasing power of those higher wages.

Setting benchmarks

Should this be HR’s problem? Possibly not – but if it affects a key talent’s propensity to stay with the organisation or seek out other offers, it should be. Guru Prasad, Business Head of Human Frames, an India-based recruitment firm, says inflation is currently rarely an integral part of wage structuring. “The HR personnel responsible for compensation and benefits in any organisation have perhaps not been adequately trained to keep in mind the inflation factor when drawing up employee remuneration plans,” he tells HRM.

Some organisations try to cover this by linking compulsory wage rises to the projected inflation rate but this can be an extremely fluid metric. Wherever the projection does not meet up with the eventual rate in reality, the differences between wages and prices could be even more skewed from each other. Finance departments that peg pay to inflation rates may end up processing many orders of recovery of excess salary paid to staff. For instance, if the expected rate of inflation is 1.5% and wages are increased accordingly, employees may be expected to forgo part of their pay if inflation turns out to be only 0.5%.

This is particularly true when the opposite of inflation occurs. While deflation – the falling of prices across the board – is relatively rare, there are very few organisations that will try to adjust wages downward as a result. The psychology of falling wages – rather than simply a less-than-expected pay rise – can be highly negative and it is a brave HR department that will attempt to cut wages in the face of deflation.

For Amy Chong, Director of Rewards – Asia Pacific, Philips Electronics Singapore, this is the key reason to avoid inflation pegs in compensation packages. “Generally, we do not want to compensate for inflation as we don’t deduct salary during deflation,” she says.

Other bills

Inflation is certainly taking hold in Singapore, but the connected costs of employing staff are also rising for Singapore’s business community. Recent government announcements including the higher foreign worker levies and increased employer contributions to workers’ Central Provident Fund (CPF) accounts, as well as the discontinuation of the Jobs Credit scheme, have meant that employers are paying out more (on top of wages) for every staff member in their headcounts.

The oil and gas industry could be an exception. Karunesh Prasad, Regional HR Manager–Asia Pacific, GE Oil & Gas, says wage costs make up a significantly small portion of overall revenue due to nature of their product line and dollar value. “Our wage bill is going up mainly because we are hiring specialised talent and bigger leaders than we even did in the past to manage the growth we are seeing in this region,” he says.

Nonetheless, DBS economist Irvin Seah says increase in business costs should not be a factor when deciding on wage rises. “It is a known fact that Singapore is not a cheap place to do business,” he tells HRM. “Costs will continue to increase over time. (Companies) can never compete on a cost-basis.”

Meeting expectations

Wages are increasing. Prices are increasing. And the ancillary costs associated with employing staff are also on the rise in Singapore. But none of this appears likely to reduce the expectations of workers – giving employers some difficult dilemmas to ponder in the New Year.

Given the recovery and (cautiously) optimistic outlook for Singapore, employees who have remained committed to their organisations, have expressed a clear expectation that they will be soon rewarded with higher remuneration, if not already.

Cyrille Tan, General Secretary, United Workers of Electronic and Electrical Industries, says workers deserve the increased pay. “Over the past two years, there were wage freezes and no bonuses,” he tells HRM. “Workers tightened their belts. With everything going well now, we should give back.”