The Origins and Development of Bonus Payment System in Singapore

As Singaporeans reflect on their growing affluence over the last four decades, it is timely to remember that bonus as an integral part of Singapore’s remuneration system has contributed significantly to their good life. Payment of bonus now permeates both the public and private sectors, and has even spread to domestic employment, whether as a legal requirement or as an incentive for promoting employee loyalty or efficiency. It represents a sizeable portion of many Singaporeans’ annual pay package.

From its lowly beginnings as an ex-gratia reward for services rendered, bonus became a crucial industrial relations issue after the Second World War, culminating in its absorption as an important component of Singapore’s wage system. It has enabled Singaporeans to achieve one of the highest savings rates in the world.

Without it, many of us will be unable to own cars, properties, stocks and shares, or to indulge in foreign travels. Tertiary education for our children may also be beyond our reach.

What are the origins of our bonus payment system? Is it indigenous to Singapore, or did we import it from elsewhere and refine it to suit our changing needs and circumstances? It would appear, from various available sources, that it had its genesis in China and later spread to overseas Chinese communities and other East Asian countries.

While its origins are lost in antiquities, Chinese records show that, as an incentive payment, bonus came into usage during the Song Dynasty (960-1276 CE). It later became a common practice for employers to give bonus to their employees for their loyalty and industry.

When modern Singapore was founded by Stamford Raffles in 1819, many Chinese from the neighbouring states came here to trade, to seek employment and to take up residence in order to enhance their live.

Unlike the European businessmen with superior financial resources, the Chinese traders had, perforce, to embark on modest ventures because of lack of capital. The Chinese were then engaged mainly in the sundry goods business or the planting of pepper and gambier in the forest fringe of Singapore. Those who could afford to hire workers paid them pittance compared to European employers. Through sheer hard work and thrift, the Chinese employer’s business grew in scope and profitability over time.

To cater to future expansion, he needed cheap and familiar labour whom he could trust and control.The answer lay in recruiting them from poverty-stricken parts of China.

This brought into being a class of “Labour Broker” who would, for a handsome fee and paid expenses, obtain such workers from China.

In China, the Labour Broker would blatantly exaggerate the boundless opportunities in Nanyang, present day Southeast Asia, to those who dared seek its riches in a strange land. As life was harsh in China, young men from the Guangdong and Fujian provinces were attracted by the prospects of some years’ sojourn in Nanyang for a life of ease in China later.

The Labour Broker would personally accompany these job-seekers to Singapore by Chinese sailing junks before the advent of steamships.

The immigrant worker quickly discovered that the “Promised Land” was no paradise on earth. In reality, it would be a long time before he would be free to undertake work of his choice, because he had first to pay off the considerable debts owed to his employer for his procurement.

He would work from dawn to dusk without any rest day except for a few days’ respite during the Lunar New Year. There was little humanity in this exploitative system of recruitment. Immigrant workers related to the would-be employers generally fared better.

The more humane Chinese employers began to realise that it would be in their long-term interest to treat their workers better. They therefore offered a traditional bonus payment, as an incentive. This would normally be given after the close of business accounts on Chinese New Year Eve, provided the trading results justified it.

In addition to paying bonuses, Chinese employers also provided their workers with free board and lodging.

In the course of time, bonus payment became a common practice among Chinese employers and emulated by European and other employers here.

By being more considerate to labour, progressive Chinese employers were able to retain their service. However, the more enterprising of them would, once their contractual obligations were fulfilled, leave to set up their own businesses. They are said to have ”arrived” and would be the envy of their fellow workers.

The unfair labour practices perpetrated by unscrupulous employers continued unabated until adverse public opinion forced the colonial Government to pass a Labour Ordinance in 1926 giving some statutory protection to immigrant workers.

The great depression of the 1920s and 1930s brought gloom to the Singapore economy. Wage reductions and mass retrenchments ensued, and discretionary bonuses were discontinued. After the world slump was over, the Singapore workers regained lost benefits, including bonuses.

They had, however, learnt a painful lesson and saw the need for unity in order to secure better terms from their employers. They formed various workers guilds, precursors of latter-day trade unions, to promote their collective interests.

It was a tribute to the diligence, thrift and strength of character of Singapore workers that, despite adversity, many rose above their humble antecedents and built up vast business enterprises which became the backbone of Singapore’s economy. Some did return to a life of ease in their lands of birth, but most made Singapore their home.

The post WWII development of bonus is closely linked to the emergence of militant trade unionism. Employer’s discretion was gradually eroded as workers sought a fair share of the profits which their efforts had made possible.

The war wrought havoc on the Singapore economy, which was plagued by serious problems of high unemployment, rampant inflation and ballooning of prices for essential foodstuffs like rice. Wages, however, remained at the 1941 pre-war level.

This led to unprecedented wage rises of between 100 and 200 per cent. Bonus payments stopped, until employers could absorb such abnormal wage increases.

Wages became the most crucial industrial relations issue.Industrial unrest spread throughout the second half of the 1940s.This was inimical to Singapore’s economy.

The Korean War (1950-1953) brought with it an unexpected economic bonanza to Singapore, due to unparalleled world demand for Malayan tin and rubber, with attendant sharp price rises. This benefited all sectors of economy, particularly the rubber industry in both these territories. Generous bonuses, ranging from six months’ to one year’s salary, were commonly granted to employees as great fortunes were being made by some employers.

Singapore workers, having tasted the fruits of trade unionism, now pressed for even higher wages. Consequently foreign investments in Singapore plummeted. More trade unions were formed to champion the cause of the working classes.

The Labour Front Coalition Government came into power when Singapore achieved internal self-government in 1955. To combat the deteriorating industrial relations climate, it enacted the landmark labour legislation to regulate working hours and other essential employment terms.

Notwithstanding these measures, industrial relations continued to worsen. Having made inroads on the wages front, unions now demanded that bonus be negotiable.Some employers gave in to union pressures, with serious implications for them later.Workers’ strikes and other forms of work stoppages were rampant.

In 1959, the People’s Action Party won a landslide general election and became Singapore’s first fully elected Government. In fulfilment of its election pledges, it enacted the Industrial Relations Act in 1960 as part of a scheme to achieve industrial peace with justice in Singapore.

The Industrial Arbitration Court was set up to determine trade disputes where collective bargaining and conciliation had failed.

An upsurge of union claims for wage improvements and better fringe benefits followed. They now saw the longer term advantages of having salary scales with annual increments. The unions’ claims for salary timescales were endorsed by the Court on merit.

As wages in the 1960s was significantly higher than in the 1950s, the Union now turned their attention to seeking enhanced bonuses as indirect wage rises. Employers became alarmed, particularly when no ceiling for bonus claims was in sight. They decided to act in concert before it became too late to reverse the situation.

Around this time, the powerful Bank Employees’ Union was negotiating with individual foreign banks for higher annual bonuses to achieve parity with the local banks. The foreign banks maintained their traditional stand that payment of bonus is their prerogative and non-negotiable.

The Bank Employees’ Union and the Mercantile Bank referred this dispute to arbitration as a test case. The Court ruled that bonus is negotiable, but subject to the employer’s financial capacity and the level of the employee’s wages.

Singapore financial district (Photo credit: Wikimedia Commons)

Singapore financial district (Photo credit: Wikimedia Commons)

Between 1960 and 1967, much had been achieved by trade unions on bonus. Collective Agreements between employers and unions would commonly have a mandatory bonus clause. Consequently, there was hardly an employee, outside the public sector, who would work without bonus. It had become part of the wage structure.

In 1967, the British Government announced its intention to withdraw the bulk of its armed forces from Singapore by the mid-1970s for cost reasons. This would adversely affect Singapore’s economy.

To offset this, and to encourage more foreign investments into Singapore, the Government, with the active cooperation of employers and trade unions, enacted the Employment Act. Together with amendments to the Industrial Relations Act, they streamlined statutory employment terms and ridding Singapore of restrictive labour practices which had hitherto harmed its economic interests.

To reduce employers’ operating costs, the law now limits bonus claims to not more than one month’s wages. Employers already paying higher amounts would have the quantum frozen at that level.

By taking the above measures, coupled with pragmatic economic planning, foreign investments poured into Singapore, led by blue-chip multinational enterprises.A mini-economic boom resulted, leading to double-digit growth. By the end of 1970, the Government’s farsighted economic policy had succeeded, as Singapore began to enjoy near-full employment.

In recognition of workers’ cooperation and sacrifices, which had helped make the economic miracle possible, the Prime Minister appealed to employers, who had done exceptionally well, to consider making ex-gratia payments to their employees over and above the statutory bonus ceiling.

Employers were apprehensive that this might be exploited by unions to circumvent the legal ceiling.Nonetheless, the more enlightened among them responded positively to the appeal.

The unions’ reaction to employers’ general response was to call for the removal of the bonus restriction.

Employers’ organisations then appealed for scrapping the bonus system and replacing it with wage reforms that would compensate such loss.

The Prime Minster believed it was bad psychology to talk of abolishing bonus which had served Singapore well. It was also a form of enforced savings for workers.

Not surprisingly, bonus became a burning national issue, with the whole community debating its merits and demerits.

In 1972, the National Wages Council (“NWC”) was set up to formulate a National Wages Policy and annual salary increase guidelines for the private sector.This was later extended to the lower paid staff in the public sector.

Among its inaugural guidelines, the NWC recommended that bonuses be capped at three months’ salary and laid down formulae to cater to varying circumstances.

The NWC system, despite some shortcomings, had worked well.Its annual wage increase guidelines had helped remove potential trade disputes that might otherwise arise. and helped to cushion off the effects of cost of living increases.

To emulate the private sector remuneration practice, the Government around mid-1970s introduced the 13th month bonus payment to all levels of public servants in order to bridge the income gap of private and public sectors employees and to make the public service careers more attractive to those on their payroll. As a further incentive,this payment was later further enhanced to be closer to the private sector practice.

With rapid economic expansion between 1972-1978, the NWC recommended high wage increases from 1979-1984, to stimulate upgrading of employee skills and to support Government’s policy of attracting more value-added industries here.

The Treasury, Singapore (Photo credit: Wikimedia Commons)

The Treasury, Singapore (Photo credit: Wikimedia Commons)

However, the High Wage Policy was partly responsible for the increased business costs in Singapore. Unfortunately, productivity lagged behind wage increases. This led to a sharp economic recession in 1984 and 1985. However, thanks to timely remedial actions by Government, coupled with support of employers and commendable sacrifices by employees, including the compulsory Central Provident Fund contributions cuts, Singapore was able to resume its steady economic growth from 1986 onwards.

The recession brought about the need for wage reforms. In 1986, NWC introduced a Flexible Wage System which has three components. First, a base salary reflecting the job value and providing income stability. Secondly, an annual supplement pegged at the quantum of bonus paid before 1986. Finally, a variable bonus, depending on the employer’s annual profitability and/or productivity.

An important feature of the new wage system is that annual increment is kept small, with a recommended salary range of 1.5 times between the maximum and minimum of the scale. This would enable employers to adjust the annual increment in response to the prevailing economic condition and to reduce the fixed wage cost when needed.

This three-component employee compensation system was later also extended to the public sector, with some suitable modifications.

Towards the close of 1990s, the Flexible Wage concept has been adopted by more than eighty per cent of the unionised companies in Singapore. However, in view of the buoyant economy resulting in a tight labour market, many employers had, perforce, to deviate from it in order to recruit and retain employees in their service.

With the coming of the new millennium, the three-component flexible wage system had become the norm with unionised employers in Singapore.

The more established and forward-looking among them, led by banks and multinational companies, had decided to merge the variable element of their employees’ remuneration package into their basic pay. In addition, they began to introduce a new incentive bonus scheme to further reward their staff for their individual work performance, productivity and other areas of contributions to their employers’ well-being.

The Asian Financial Crisis of 1997 and the more recent 2008 worldwide financial turmoil, which began in the US but later spread to many other parts of the world, did have some adverse repercussions on Singapore. Unionised employees and public servants were accorded lower salary increases and variable and incentive bonuses but not for too long.

The original purpose of bonus, as an incentive award,had, over time, become firmly entrenched as a feature of the Republic’s wage structure in both the private and public sectors.

In the ensuing years,its scope has been widened to include payments for good performance, productivity, good attendance, special events and collective agreement signing. It also covers stock options and straight profit-sharing, more commonly practised for the higher echelon of executives in the private sector.

Huge bonuses are now paid to top executives of large companies and banks, other financial institutions,  top stock brokers, trading and commercial houses, among others. Other rank and file employees in banks, oil companies and ,multinational enterprises also enjoy generous bonuses.

The public sector too followed suit and started to award a performance bonus to the senior and top echelon of public servants as well the political appointees, and their respective performance bonuses will be very substantial in a year of good economic growth.

In a good year, a unionised employee in a large firm can aspire to receive between two to four months’ additional salary, depending on their work performance, likewise the executive staff can be paid bonus of between six to twelve months’ pay.

What about the Public sector personnel? If economic growth justifies it, the lower ranked public servants can expect to receive two and a half to three months’ variable bonus payment. In addition to the above bonus, senior public servants can reasonably expect a quantum of about six to ten month’s performance pay reward, while the very top echelon of them, like Cabinet Ministers, up to fourteen months’ pay.

Compared to the turbulent industrial unrest of the 1950s and 1960s, it is now fair to conclude that the government’s declared aim to achieve industrial peace with justice has been achieved. Apart from legislative reforms in industrial relations whenever needed, the genuine tripartite cooperation over time between the unions, the employers and the government has made this a reality.

Nowadays collective bargaining is usually conducted in a much more friendly and rational way, free from the acrimonious atmosphere of the more antagonistic past era. Major terms of employment, like salaries and bonuses, are usually resolved with give and take on both sides in the overriding national interest.

In the light of this, both employers and unions are now paying more attention to the vital concerns of the employability of the employees and to retrain and upgrade their skills in order to meet the changing needs and circumstances of the more sophisticated and demanding Singapore economy, with resultant benefits to both employees and their employers.

What will happen to Singapore’s bonus system in the 21st Century? My crystal ball-gazing tells me that it is definitely here to stay. It has become, and will continue to be, an inalienable part of our remuneration system for salaried persons. New forms of bonus payments will no doubt evolve in response to changing economic trends and the national fortunes of a more competitive Singapore.

Lam Pin Foo

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s