It is important to know what the flexible wage system is, the wage components and how they affect you as an employee.
As Singapore navigates out of the Covid-19 pandemic, the variable component of wages could be a method companies have decided to keep to as a buffer for future crisis. Opting for a flexible wage system, could prove to be more beneficial than cutting base wages.
What Is Flexible Wage System?
In 1986, following the 1985 recession, the Flexible Wage System was introduced in the form of an annual variable component (AVC). After the Asian Financial Crisis, in 1999, the monthly variable component (MVC), on top of an AVC, was introduced.
The Flexible Wage System is a wage system that gives employers more flexibility by building in a variable component into wages. This is different from the standard wage system where the wage is fixed and there may be an annual wage supplement (AWS) or 13th month bonus, depending on the company. In this case, the AWS is considered a form of deferred basic wages and not a variable component.
Under the Flexible Wage System, your wages comprise a monthly fixed component, a monthly variable component (MVC), and an annual variable component (AVC).
The monthly fixed component is what is commonly understood as the base pay or basic salary. This is the amount that your employer is legally obligated to pay you under the Employment Act.
The variable components are the amounts that may be adjusted depending on factors such as company performance and productivity incentives. A common example of monthly variable component (MVC) is sales commissions. Bonuses and annual wage supplement (AWS) are counted under annual variable component (AVC).
Your monthly CPF contributions, overtime pay, salary in lieu and paid leave are all computed on your monthly gross wages, comprising the monthly fixed component and the monthly variable component.
The National Wages Council (NWC) recommends a varying percentage of variable components for different levels of employees:
What Is The Advantage Of Having A Flexible Wage System?
According to NWC, 29.3% of employees are on the Flexible Wage System in 2019, and there is the goal increase this to about 70% to 90%.
The reason that NWC and their tripartite partners are pushing for a move towards Flexible Wage System is that it allows companies the flexibility to use wage adjustments to respond quickly to business conditions.
In theory, the variable components allow companies to reduce wages when times are bad and to increase wages when times are good. It limits the potential wage cuts to the variable components while allowing for greater upside when the business recovers. The factors affecting variable components should be communicated clearly and are usually set out in the company’s compensation policy.
In accordance with NWC 2021/2022 Supplementary Guidelines, companies who are not already on Flexible Wage System should immediately implement it. For employers that have recovered or are recovering, they should restore any wage cuts implemented earlier.
How Does The Flexible Wage System Affect You As An Employee?
Legally, the Employment Act only obligates the employer to pay you your basic wages (the monthly fixed component), unless stated otherwise in your employment contract or the collective agreement with the unions.
This means that as an employee, you cannot expect your employer to pay you AWS or any other bonuses that is not stated in your employment contract or collective agreement. A bonus is literally a bonus and should not be taken for granted. Variable components are not compulsory.
However, employers are expected to provide clear communication regarding wage adjustments and identify clear indicators that trigger a need for wage adjustments. Your employer cannot and should not cut your wages without a clear business case and, according to NWC guidelines, already utilised all other cost-saving measures.
Typically, wage adjustments are first done through the annual variable component (AVC), through adjustments to bonuses. The monthly variable component (MVC) is typically the last component to be adjusted as it has the most impact on employees and their ability to maintain their lifestyle and service their mortgages and loans.
Another aspect that Flexible Wage System may affect you as an employee is your ability to take and service a loan. In a conservative calculation, some banks may only consider the monthly fixed component of your wages and discount the variable components. Considering that the variable components make up 30% or more of your salary, this could mean a reduction in the maximum loan that the bank is willing to loan you. The type of company you are working for and their history of paying bonuses also matters. For example, the variable components for someone working in the Civil Service are perceived as more stable.
In general, as an employee, you should read the fine print before you sign your employment contract and be clear about your company’s compensation policy. In good times, it is easy to assume that your monthly wages will be the same and that you will receive an annual bonus to fund your big-ticket expenses. However, in bad times, it would be prudent to evaluate if you can maintain your current lifestyle based on your basic salary.
This article was originally published on 22 October 2020 and updated with new information.
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