Quantitative Compensation Model

The quantitative compensation model depends on the performance scoring system as a basis for formulating a reward scheme for performance.

The detail of the components are as follows:
The NFV metric used is Economic Profit, EP (also known as Economic Value Added, EVA™ measure) with the adding back of any new investment, above normal staff training expenses and extra-ordinary promotional expenses for the year , considered the most appropriate financial measure as it takes into consideration both the organization’s employees and the investors’ interest into consideration. The definition is as follows:
EP = NOPAT – (WACC*Capital Employed)
Or EP = Invested Capital (ROIC – WACC)
where NOPAT stands for Net Operating Profit After Tax (before interest charges), WACC stands for Weighted Average Cost of Capital (all funding sources, including shareholders fund),

The Continuous Process Development metric, CPD is as follows:
CPD = a + b*Customers + c*Operations + d*Innovation + e*Manpower + f*Regulatory
where;
Customers processes (e.g. Customer relationship management, customer service turnover time)
Operations processes (e.g. supply chain, flexible production)
Innovation processes (e.g. Quality Function Deployment or also known House of Quality approach, concurrent prototyping and market testing)
Manpower management processes (e.g. internal 'selling' process of management objectives to staff, appropriate structure of staff performance review system)
Regulatory or Social Processes (e.g. lobby process, strategic public communication program) and
a, b, c, d, e and f are constants related to the specified indicators.

The choices of special projects for development, SPD are wide and diverse or at times, none for certain business years. Hence, it is necessary to dedicate a metric to monitor and reward its performance based on the pre-defined organization indicators for the projects.

To illustrate the application of metric, two possible projects for organization development are namely; mergers and acquisitions, M&A or market share goal.

The possible key indicators in market share metrics are:
a) The percentage market share attainment of each business units.
b) The level of customers’ awareness change of the organization or its products.
c) The level of ‘positiveness’ towards the organization or its products’ image
i. The success level of channel development
ii. Other criteria that are in congruent to market share goal

Given that each strategic process development project are different, the SPD metric will be defined as follows:
SPD = a + b*Indicator 1 + c*Indicator 2 + …...+ n*Indicator N
where each of the Indicator, 1 to n represent the respective key indicators that are chosen and its respective constants.

The Share Price Metric, SPM metric is defined as follows:
SPM = (MVAYearN+1 – MVA YearN) / MVA YearN
Where MVAYearN+1 is the MVA at the end of the year N and
MVAYearN is the MVA at the beginning of the year N.

The organization risk management, ORM metric of OP-Score model is as follows:
ORM = a + b*R + c*M + d*F + e*O + f*I + g*HR + h*E + i*P
where;
R is Reputational Risk
M is Market Risk
F is Financial Risk
O is Operations Risk
I is Innovation risk
HR is Human resource (or Manpower) and Administration risk
E is Economic risk
P is Political and Regulatory risk and,
a, b, c, d, e, f, g, h, and i are constants associated with the respective risk measures.

Building on the Performance Scoring System, the quantitative compensation model is as follows:

For further details to the rationale of these indicators and sub-indicators and the methodology of establishing the appropriate compensation system, it will be in the book that I will be publishing soon. For those who are interested in the book, please email me at artlim66@hotmail.com

Will we live to see the downfall of Capitalism?

In 1990s, the capitalist world watch the demise of the communist system, when Soviet Union broke up and the communist countries subsequently switched to capitalist system. China also begin the process of introducing capitalist system into its economy.

The failure of the communist system lies with its basic assumption or as Communism motto went 'from each his best, to each his needs'. Communism believes that the greedy 'invisible hand' of capitalism will ultimately leads to the downfall of capitalistic system in the end. To overcome personal greed and its destructive force, communism propose that a selected group of effective (and enlightened) leaders make centralised decisions on production and the distribution of the produces fairly, according to each individual's needs. Communism has failed to recognise the essence of the human motivations, that is, only out of selfish interest would man put in his best efforts and expects to be rewarded proportionately according to his contribution, and not based on his needs (propounded by Adam Smith). History proofs communism wrong on its assumption of central planning effectiveness.

Fast forwarding to 2008, we witness the possible collapse of the capitalism, almost like the way the father of Communism, Karl Marx had predicted. The self interest of Adam Smith's'invisible' hands of private enterprises (this time round, it is bankers that starts the ball rolling, thought other corporate CEOs and their fellow managers are part of the whole process) have brought chaos and destruction to the major capitalist countries financial system. The capitalists have overlook the fact that financial system is not a just a sector of the economy, but one of the main foundation of the capitalist system.

The 'invisible' hand of capitalism has gone terrribly wrong. Despite its success in seemingly getting maximum output from man, the manipulative nature of man will always game the economic system to his own personal advantage, even to the point of destroying the whole economic system at his own subsequent peril. Instead of achieving capitalism motto of "from each his best, to each his contribution", capitalists end up seeking to maximize his returns (but not his contributions) through gaming the capitalist system and not putting his best to economic production.

In short, while communism failed to recognise the human nature of maximum contribution can only come from maximum returns to each his own effort, the capitalism failed to recognise that without proper regulation and control, man will game the economic system to maximise his personal returns (even without truly maximising their own economic contribution) at the expense of the economic stability of the capitalism.

To-date, the capitalist countries still refuse to accept and correct the major inherent weaknesses of capitalism. It may be due to the fact that the rule makers still have the advantage of gaming the economic system to their own personal advantage, or they have yet to agree on what needs to be corrected. Paralysis of actions will cause further damage to the capitalism, and I hope the corrections are done before it is too late, which is now leading towards the collapse of the modern capitalist economy structure as we know them. Buying gold reflects to the progressive loss of confidence of capitalism, and indirectly, also the growing belief that barter trading is a safer bet.

Nevertheless, Capitalism has undergo many tests, and evolves succesfully despite its many hiccups. In the early period of industrialisation, the private enterprises, in its quest for profit, at times, pollute or contaminate the environment. Capitalist system later realise these 'negative' externalities. For some less damaging practices, costs were imposed and for others, there were total ban on certain activities. During the 1930s where capitalism wobbled in its excesses of financial leverage, regulations were then put in place to prevent future occurrences. Yet, many of these regulations were removed in the subsequent years as capitalists choose to believe that regulations are hindrances to capitalist efficiency, though some would attribute it to the basic human greed of allowing themselve to game the economic system once again.

The latest test to Capitalism lies with its conflict of interests practices that had seeps into the capitalist system. In addition, with the advance of information technology, it also give rise to complex and speedy transactions which made some of the regulations obsolete or weak in reining in human greed and their 'gaming' ability.

If these threats are not face head-on, we may live to witness the collapse of Capitalism which will give rise to very uncertain economic future of back to basics, barter trading system. Barter trading is definitely a weak and disabling form of economic activities.

The threats lies in the conflict of interests' practices;

1. When rating agencies are paid by the company whom they are rating, how accurate can their rating be?
2. When audit are paid by the person who they are auditing, how much truth can we expect from these auditors?
3. When the board of directors are recommended (or indirectly appointed) by the CEO, whose interests will they serve, except mainly the CEO?
4. When the independent directors are appointed by the CEO, how independent can they be, if they seek self interest (capitalist norm) of staying on board, and getting paid accordingly?
5. When the compensation committee, which is indirectly appointed by the CEO, makes their CEO package recommendation, what chance that they will recommend strict criteria of performance for compensation?
6. When risk is left to the bankers or financial institution's managers' personal discretion (managers, of which, most hardly their own banks' shares) to decide on their own, what is the likelihood of them rating risk as highest priority as compared to paying extranomical bonus to themselves by discounting risk to its minimum?

Prior to his death in 2008, the world's greatest management guru, Peter Drucker one last message to the world was the need of 'conscience' activities (or honest assessment of corporate performance are instituted) within each organisation, so as to enhance the stability of the company and in its wider contact, the stability of Capitalism.

To overcome the above threats requires a simple solution of setting up of national agencies for audit, rating, government appointed independent directors, and national financial risk assessment board which increase its level of independence. It may give rise to public servants' corruption though its is more managable than the current state of 'private' corruption. It will increase the costs or reduce the efficiency of economic activities, but not to socialise these costs would risk the ultimate economic systemic failure. As such, the costs justify itself.

Another solution would be the capitalistic approach or strong regulatory rules, similar to the legal class action framework. Rules of inpunitive punishment for gaming the system illegally are put in place, for example, if the audit firm failed to point out obvious violation of account bookings of the firm, the audit firm will incur unlimited liability exposure. But if it is a small audit firm, they are able to gain significantly and divert their rewards to their family members, then the excessive benefits gains will outweigh the subsequent costs of punishment. As such, it will not overcome the gaming of individual that can cause signficant damage to the system, as in the case of the Madoff's ponzi scheme, applicable to both the auditor firm as well as Madoff himself. Using complex legal terms and conditions, many products are sold frivolously to uninformed or unsuspecting victims who suffer hugh losses subsequently, triggering the loss of confidence in the capitalistic system.

In fact, the greatest threat to capitalist system is the capitalistic systemic failure where every man believes their greediness is justified, and their own little effort cannot make a difference to the systemic failure. As such, the bankers, the politicans, the trade unionists, the workers and even the cheaters (those who game outside the written economic rules) game the system, ensuring their own 'profit' while triggering the systemic collapse of Capitalism. Is Drucker's hope of man's own wisdom see us through this round, or will our generation lives to see the end of Capitalism?

Stable banking model--Singapore way

With the massive global credit crunch, UK seems to be moving towards nationalising their banks while US stubbornly clings on to their privately owned banks (though publicly listed). A few years ago, China ‘liberates’ her nationalised banks into the arms of the world’s private owners.

Just over the few years, we witness the wild changing fortunes of banks. Despite the heavy losses and in fact, bankrupt banks, the US remains convinced that the model of privately controlled banks will still be the most efficient in performing its roles of facilitating the economic activities of the country. US still believe Adam Smith’s “invisible hand’ of market forces works best in allocating resources, including the banking system. US is doubtful of government management of banks as political entanglements, lack of direct accountability and personal drives will compromise the bank’s effectiveness and performance.

Given the current credit crunch, UK may be forced to nationalised the banks so as to push out the loans to the businesses. Most businesses depend on certain level of liquidity (or credit support) for their working capital to function, otherwise, they will bucket under its own financial exposure. Privately owned, the bank’s managers and owners are very ‘afraid’ to extend loans to most businesses in current climate, given the high uncertainty of businesses viability across the board. When fear of business’ failures (and the extended loans) feeds on itself, it will create greater fear and even more likely to turn it into reality.

The twin devils of private and public management failure of banks seem to be a Catch-22 situation when the global economy traps itself into the corner by allowing the global banks to run amok with a total lack of accountability.

Beside the successful current MAS supervision and regulatory structure for the banks, Singapore used to have an specially created successful banking feature in the form of Development Bank of Singapore (and Post Office Saving Bank can be considered as a sister arm), fully owned by the government but operate like private entities. These two banks can be seen as one as it will still serve its purpose, that is, to provide a stable banking environment for the country’s growing economy. The government direct control of the bank allows it to guide the overall banking practices in the country through its presence and competition in the banking environment. With special emphasis for development, the bank had played an effective role of funding projects that at times, the privately owned banks avoided, especially, when the risk seems high on project basis though the returns may be even higher. The returns in the form of economic growth, stability and positive externalities that a country need, are sometimes can only be undertaken by such a bank. Such a bank will be able to offer supposedly ‘risky’ loans for great returns, and thus, pushes the privately owned banks to either catch up or be left behind.

In a way, a government owned bank (runs as a private company) will serve a function similar to the NTUC supermarket chain. It helps to stabilise the prices and practices in the period of uncertainty while still maintaining a viable banking business model. Given the great economic uncertainty, government may have to consider putting in place such a bank to serve Singapore, especially in such tumultuous time, as the global severe credit crunch tide will reach our shores soon. In fact, the major economies should also consider Singapore banking model in overcoming their current banking paralysis.

Economist's view of Sgp Y09 govt budget

In the face of a fast deteriorating US economy and rising unemployment, its effect is already felt in most other major economies, and similarly, Singapore economy is weakening. Singapore employment situation seems weirdly calm at 2.2% unemployment in Sep Y08, though it is expected rise as the months passes. A recent survey conducted by Business Times still indicate a projected Y09 average salary increase of 3.7% and bonus increase of 15.5% for Singapore labour market.

From an economist viewpoint, Singapore government has the following factors for consideration.

1. To minimize unemployment while bracing through the stormy global economy in Y09
2. To upkeep citizens’ affordability index so as to avoid a massive payment seizure of loans (personal housing, cars and other loans), and
3. To upkeep corporate viability to as to maintain the high labour employment and business continuity so as to avoid hurting the Singapore financial system
4. To continually upgrade Singapore competitiveness and to attract more companies to be set up in Singapore
5. To further diversify our economic activities into more markets and multiple sectors, while selecting niche sectors where Singapore can excel in
6. To be prudent in deploying the nation’s reserve, avoiding high risk bets while be bold enough to take advantage of opportunities that will yield strong positive long term results
7. To be watchful of social stability and affordability of the citizens during this difficult period that may last for several years.

In view of the humongous tasks ahead and at times, conflicting goals, the government decided to adopt proactive approach of introducing new fiscal policies and NWC review in Jan 09 instead of the normal budgetary policies period in Mar 09 and NWC review in July.

To achieve the above goals, Singapore government would probably consider the following for the businesses and related impacts.

1. Government to accumulate the finance from a relatively good Y08 through the normal tax revenue (that is, no tax benefits for Y08 earnings/income) so as to allow the government the flexibility and scope of fiscal injection in Y09.
2. To introduce attractive tax incentives for companies to continue their business and even expansion for Y2009, possible tax incentives may be announced; reduce corporate tax to 16% for fiscal year 2010 (or tax on Y09 profits) and to reduce personal income tax brackets further so as to support domestic consumption for Y09. After all, consumption will yield 7% GST revenue to the government. One possible corporate tax rebate policy that should be considered for Y09 may be to allow companies to claim double the new staff salary costs incurred and one and a half on existing staff costs, so as to minimize unemployment and to lower companies’ headcount cost. The government will continue to offer special tax rebates for certain high technology and service sectors which the government would want to encourage. In addition, further support for local entrepreneurship in a form of direct government loan may be put in place.
3. If their effort of making loans through the banks do not significantly improve, Government may revitalise or create new financial agencies to make loans directly companies as banks are still too tight-grip on their business lending even with governmental financing support.
4. At this stage, January Y09, it will be considered too early to cut the percentage of all CPF contribution, though there will be a review as to whether there is a need for a downward adjustment to the CPF contribution in July 09, should the economic worsen significantly. This is to allow home owners to financially prepare for possible change of CPF contributions ahead. Come, July Y09, if need to, the government may cut employers’ CPF contribution and in an even more severe economic condition, employees’ CPF contribution may also be cut. The cut/s depends on the degree of the economic severity.
5. Commercial property and land tax to be lowered, so that JTC and other big commercial property owners can pass on the savings to the companies operating in Singapore.
6. Some fiscal stimuli were announced recently, SPUR, infrastructure works to be brought forward,…etc but Singapore government are lining more projects as the year 2009 progress, to be ready to meet any serious downturn of the economy. One such project like Singapore-World Bank Urban Development training program, and also other like expanding the education sector, health-care sector, bio-medical sector and many other are already in the pipeline and many more to come if need to.
7. It is a bit too premature to stimulate the private housing sector in this January Y09 budget, as it is too early to assess the fallout of global property bubble and the aggressive US economic rescue package, though it may be considered at the later stage.

Though it may not be in the budget, but under separate forum under the MAS, a temporary weakening of the SGD would be helpful in reducing overall operating costs for existing and new companies setting up in Singapore.