In this climate of economic uncertainty, Singapore’s National Wages Council (NWC) late last year urged more companies to adopt the flexible wage system. Overall, the flexible wage system is one of the key features of Singapore’s approach to economic development and can have an impact on individuals both directly and indirectly.
Additionally, the flexible wage system is part of Singapore’s broader efforts to maintain a competitive and efficient economy. By linking wages to performance and economic conditions, the system encourages productivity and efficiency, which can benefit the wider economy and society.
If you’ve never heard of this term, it’s important to find out what it entails and how it could affect your salary.
What is the Flexible Wage System?
The Flexible Wage System is based on the principle of wage flexibility, which means that wages are adjusted according to changes in the labour market and business conditions. Under the Flexible Wage System , employers have the flexibility to adjust wages based on skill level, productivity, as well as market demand. This means that employees are paid according to their performance, and those who perform well are rewarded with higher wages.
In a nutshell, this performance-based and flexible wage system enables companies to:
- Adjust and better manage its employees’ wages during bad times
- Reward employees with bigger remuneration during good times
The Flexible Wage System is currently made up of the monthly fixed component (better known as basic salary), the Annual Variable Component (AVC) and Monthly Variable Component (MVC).
This system was first introduced in 1986 with an annual variable component, following the 1985 recession. In 1999, after the Asian financial crisis, the NWC recommended the inclusion of a monthly variable component to enable businesses to react better to changing business situations.
The Flexible Wage System is a win-win situation for both employers and employees. Employers benefit from the flexibility to adjust wages according to market conditions, which helps them to manage labour costs and stay competitive. Employees benefit from the opportunity to earn higher wages based on their productivity and skills, which provides them with an incentive to work harder and improve their skills.
Under this system, the rank-and-file workers will be the least affected in times of uncertainty. The recommended monthly variable component ranks as such:
|Monthly Fixed Component
|Annual Variable Component (AVC)
Monthly Variable Component (MVC)
Annual variable component (AVC) is typically made up of bonus, variable payments and/or Annual Wage Supplement (AWS). AVC is usually given on an annual basis to reward workers for their contributions and encourage them to perform better.
What is the Annual Variable Component (AVC)?
The AVC, which reflects economic conditions, is usually set based on a multiple of a civil servant’s monthly salary.
NWC’s recommended level of AVC is 20 percent of rank-and-file employees’ annual wages, and a higher percentage for the middle and senior management, since they have to bear more responsibility in shaping the company’s business outcome.
What is the Annual Wage Supplement (AWS)?
The Annual Wage Supplement (AWS) is not mandatory under Singaporean law, but it is a common practice among many employers in Singapore as a way to reward and retain their employees. The amount of the AWS can vary depending on a number of factors, including the employee’s job level, performance, and length of service.
Also known as the “13th month bonus”, the AWS is a one-time payment on top of your total annual wage. This is not mandatory, depending on what is stated in your employment contract. The amount of the AWS is typically calculated as a percentage of your monthly salary, with the percentage varying depending on the company’s policies and practices. The standard percentage for the AWS is usually one month’s salary, but some employers may offer a higher percentage for higher-performing employees or as a retention incentive. If your company’s business is not performing well for the year, your employer may negotiate a lower sum of AWS.
How it affects you
In normal times: You’re working in the aviation industry. In 2019, your company performed well and you were rewarded with your AWS and a year-end bonus of $500.
In bad times: Your company was badly affected by the Covid-19 pandemic this year and announced that you will not be getting your year-end bonus. However, your AWS remains unaffected. As such, you will be receiving a 2-month paycheck, comprising your monthly fixed component and 13th month bonus.
What is the Monthly Variable Component (MVC)?
The Monthly Variable Component (MVC) is a backup component used by employers to cushion the impact of downturns, in order to keep the business afloat. MVCs work by reassigning a portion of employees’ wages from standard employment income to an MVC.
How it affects you
In normal times: You make $2,500 a month. Your pay remains unaffected and you take home $2,500 that month, with $250 (10%) forming the MVC and $2,250 being your basic salary.
In bad times: Your employer can lower wage costs by implementing the MVC in full or partially, dependent on the impact of the economic downturn. For example, your employer implements a 5% cut on your MVC, your take-home pay will then be $2,375, made up of your $2,250 basic salary and the MVC reduced to $125.
How does the Flexible Wage System benefit you as a worker?
This system was implemented to help companies save costs, and in turn save jobs. Instead of a retrenchment, your company may look at adjusting the flexible portions of your wage package instead. In the event that a wage adjustment is necessary, your employer has to identify clear indicators and communicate this to you clearly.
Your employer cannot deduct your salary without a clear case. In accordance with the NWC guidelines, your employer can only adopt the wage adjustment as a last resort, after exhausting other cost-saving measures.
Additionally, the Flexible Wage System encourages skills upgrading and training. To improve productivity and earn higher wages, employees like you and your peers will be kept motivated to upgrade your skills. This helps to create a skilled workforce that is able to adapt to changes in the labor market and stay competitive.
When the business recovers, your pay should subsequently be adjusted accordingly.
What can you do?
Singapore’s Flexible Wage System is a unique system that provides both employers and employees with benefits and flexibility. It helps to create a skilled workforce, reduce income inequality, and provide non-monetary benefits to employees. However, it also requires careful monitoring and evaluation to ensure that it is fair and equitable for all employees. Overall, the Flexible Wage System is a key factor in Singapore’s success as an innovative and competitive economy.
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