Anthony B. L. Cheung

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Civil Service Pay Reform in Hong Kong:

Principles, Politics and Paradoxes
Anthony B. L. Cheung
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Introduction
Hong Kong has inherited from its previous British colonial masters a civil
service pay system based on "fair comparison" with the private sector,
through the conduct of periodic pay level reviews and annual pay trend
surveys. Such a system, based on externally-derived indicators, has
helped to minimize management-staff conflicts and to provide a stable
pay regime for the civil service and the wider public sector as a whole,
something which was particularly important in the 1990s, as Hong Kong
entered the final stage of political transition to become a special adminis-
trative region (SAR) of China on 1 July 1997. The downside of the
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system is that it fails to address the issue of the productivity of civil
!~ servants, taking productivity in the private sector, which determines pay
~' trends in the market, as the basis for civil service pay adjustments. Nor
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j has the performance issue been factored into the system.
i
i In the post-1997 era of the SAR, especially since the outbreak of the
l Asian financial crisis, which triggered the worst economic recession in
three decades, civil service pay levels have become increasingly a matter
of public concern. In March 1999, the new government published a
consultation document on Civil Service Reform, which proposed reforms
in entry and exit arrangements, pay and conditions, conduct and discipline,
and in the performance management of the civil service, wiih the aim of
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Public Service Reform in East Asia 8. Civil Service Pay Reform in Hong Kong 159
rendering the service more flexible, motivated, proactive and responsible

according to the principle of "fair comparison" with the private sector, on
(Civil Service Bureau, 1999a). The possibility of adopting a performance- the grounds that, firstly, the government does not intend to lead or
based system was also discussed (ibid.: 15-16). Most recently, public influence the market in wage rates; and secondly, that since it is impossi-
pressure for pay cuts in the public sector, coming particularly from the
ble to determine pay for civil servants according to their market values,
business sector, had built up, and reference was made to similar action
the only fair and efficient way is to link the pay levels of different
taken by the Singapore government amidst renewed global recession. In
categories (or grades) of civil servants to their counterparts in the private
December 2001, the Secretary for the Civil Service invited the three
sector, in order to ensure that the government only pays civil servants the
major civil service salaries advisory bodies to conduct a comprehensive
prevailing market wages, and at the same time is able to maintain
review of the pay policy and system for the civil service. 1 In his maiden
competitiveness vis-a-vis the private sector in recruiting and retaining
budget speech on 6 March 2002, former Financial Secretary Antony
staff of good calibre. When making comparisons with the private sector,
Leung announced a 4.75 per cent pay cut assumption for financial
the government tends to use larger employers with better pay practices as
planning purposes, pending the outcome of the annual pay trend survey
the sample, in order to put government in the category of a good em-
(Leung, A. K. C. 2002: para. 67), much to the annoyance of the staff side.
ployer, with generally more favourable terms and conditions provided to
Civil service pay issues have since become the subject of extensive public civil servants than to average private sector employees.
debate. Throughout the following year, government-staff side relations
Prior to 1974, an ad hoc approach was adopted by the Hong Kong
were strained by the pay disputes, which saw civil service unions
government for the review and adjustment of civil service salaries. Every
launching the largest-ever protest against pay cut legislation in July 2002,
five years or so, the government appointed a Salaries Commission to
with some 30,000 civil servants and their supporters taking to the streets
conduct a comprehensive pay survey, involving comparison with the
(South China Morning Post, 8 July 2002).
private sector in order to make suitable pay revision proposals. The 1965
This chapter sets the scene for understanding the current discussion
Salaries Commission put into practice the principle of "fair comparison"
on civil service pay reform in Hong Kong, points to the politics of the pay with the private sector as follows:
issues-in terms of both bureaucratic considerations and the wider
political agitations-and considers how such reform may be taken
(a) Whenever any reasonably large number of persons can be found
forward, with due regard to the important principles that should underpin
both within the public service and outside it engaged in closely
any civil service pay system, such as efficiency, fairness, management
comparable work, fair comparison with the remuneration in com-
needs and political acceptability. Paradoxes and dilemmas of reform are
parable employment outside government should be adhered to as
identified and the long-term implications of any major systemic changes
closely as possible, subject always to the allowances that must be
to the nature and operation of the civil service are also explored.
made for differences in the two fields of employment as regards
methods of payment, conditions of service generally and career
Hong Kong's Civil Service Pay System: History and prospects;
Evolution (b) Internal relativities should be regarded as complementary to fair
comparison where the latter principle can be and should be the
first consideration in other cases (Standing Commission on Civil
Pay Principles-Fair Comparison and Internal Relativities
Service Salaries and Conditions of Service [hereafter Standing
Historically, Hong Kong has followed the British Priestley model (after Commission], 1979: para. 16, my emphasis).
the 1953 Priestley Commission-see Megaw Committee, 1982: Vol. 1,
Chs. 2 and 3), and run a civil service pay system which is established The 1971 Salaries Commission not only endorsed this principle, but went
further, to recommend that comparability with the private sector should
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override all other considerations, including internal relativities (Standing • Fair comparison with comparable counterparts in the private
Commission, 1979: para. 16).
sector;
An extension of the "fair comparison" .Principle was made in 1968, • Internal comparisons within the civil service, particularly for
when the government reached a pay settlement agreement with the staff those grades lacking comparable external counterparts;
side, in the form of the Statement of Principles and Aims of Civil Service • Acceptability by the civil servants as being fair;
Remuneration, in which the former accepted "a duty and responsibility to • Acceptability by the public as being fair;
maintain a civil service recognized as efficient and staffed by members • Ability to attract and retain candidates of good calibre; and
whose conditions of service are regarded as fair both by themselves and • Paying lower-rank civil servants better salaries than their coun-
by the public which they serve" (Standing Commission, 1979: para. 13). terparts in the private sector.
This in effect allowed a delicate balance to be struck between what civil
servants and the public at large would respectively deem as fair. Such a
generously-worded statement was issued at a time when the colonial Methodology ofPay Surveys
government had just recovered from the turbulence of the 1967 riots While the 1965 Salaries Commission formalized the principle of fair
instigated by pro-communist elements, and felt it necessary to boost civil comparison, no specific mechanism for implementing this principle was
service morale with an attractive pay policy. recommended. It was not until the 1971 Salaries Commission that a
The Standing Commission on Civil Service Salaries and Conditions proper method was adopted. This method involved the division of the
of Service, set up in 1979 in the aftermath of disputes with civil service civil service into occupational classes, in the belief that for each class a
staff unions on matters relating to pay and conditions, reaffirmed the "fair range of comparable work could be found in the private sector. Over 30
comparison" principle, taking the view that occupational class surveys were conducted between 1972 and 1974 by the
no other means of regulating levels of pay in general will ensure public ac- Pay Investigation Unit of the Civil Service Branch (re-titled Civil Service
ceptance and ... [it is] essential that civil service salaries do not get out of Bureau after the establishment of the SAR). The occupational class
line with that sector of the economy producing the income from which they survey system proved to be unworkable and was much criticized, not only
are paid (Standing Commission, 1979: para. 20).
because no truly comparable work existed in the private sector for most of
However, the Commission also considered that such a principle should the occupational classes, but also because the creation of such classes by
not necessarily be the overriding or the major consideration. In its words, sometimes arbitrary groupings had disturbed the traditional and long-
"if there is to be a first principle, it should be the old but well-tried standing relativities then prevailing within the civil service, thus leading
principle that salaries should be sufficient to attract and retain candidates ·to great discontent among the staff concerned (Standing Commission,
of a calibre who will provide the public with an efficient service" 1979: para. 21; Burrett Committee, 1989: para. 2.1).
(Standing Commission, 1979: para. 20, my emphasis). In 1974, following the failure of the occupational class survey system,
The significance ofthe Standing Commission's policy lay in its em- the annual pay trend survey system was introduced. Under this system, an
phasis on fair comparison, and in its flexibility to cater for market forces annual survey of pay trends in the private sector was conducted, and the
as well as for the government's internal management needs as the findings-"pay trend indicators"-were used as the basis for determining
employer. The Standing Commission also expected the government to be annual pay adjustments for the civil service. For the purpose of such
"among the better-paying employers in relation to the lowest paid" surveys, the civil service was divided into three broad salary bands, and
(Standing Commission, 1979: para. 28), with the result that lower-ranking changes in pay and certain cash benefits enjoyed by employees within
civil servants were generally paid higher rates than their private-sector similar salary bands in selected private companies were assessed. 3 The
2
equivalents as a matter of policy. Hence, from the 1980s onwards, civil introduction of pay trend surveys also coincided with the advent of an
service pay policy has comprised several key elements, namely: inflationary economy in Hong Kong, making it all the more pertinent for
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162 l
the civil service to catch up with private ~ector pay levels on a more 6
staff side. In the end, the government was forced to appoint an independ-
frequent basis than hitherto afforded by the five-yearly Salaries Commis- ent Committee of ·Inquiry (Burrett Committee) in 1988 to provide
sion reviews.
arbitration.
By the late 1970s, following the widespread expression of staff dis- In its final report in March 1989, the Burrett Committee (1989: Chs.
content over pay levels and pay relativities, the government had decided 5 and 6) recommended that, in future, pay level surveys should form the
to deviate from the traditional approach to pay revision. Instead of using foundation of the civil service pay system, and should be carried out at
an administration dominated one-off salaries commission, it established a three-year intervals in order to keep a closer track of the private sector
Standing Commission on Civil Service Salaries and Conditions of Service rates for various grades. Such surveys should be based as far as possible
("Standing Commission") in 1979, to be independent of the administra- on job-for-job comparisons. A number of "marker" grades with identifi-
tion and comprised entirely of non-officials. The Standing Commission able functional counterparts in the private sector should be used as
immediately undertook a review using a more systematic approach, with comparators. The pay of those grades not covered directly by the survey
the aim of keeping salaries and conditions of service under regular should be determined by internal pay comparisons. During the years
examination.
intervening between pay level surveys, pay trend surveys should provide
Between 1979 and 1980, the Standing Commission carried out a the basis for annual pay adjustments, in line with the overall pay adjust-
comprehensive civil service salary structure review, opting for the ment trends in the private sector.
"qualification method" in lieu of the previous occupational class survey The Burrett Committee recommendations were not explicitly
4
system, as a result of which a new pay structure was instituted. This new accepted by the government, but neither were they rejected. By that time,
pay regime, together with the annual adjustments derived from pay trend the government had already invited the Standing Commission to conduct
surveys, forms the foundation of the existing civil service pay practice. an overall review of the salary structure of the civil service. When
Another round of overall reviews of the non-directorate civilian salary commenting on the Burrett Committee recommendation, the Standing
structures was conducted in 1989 and 1991/ following pay disputes that Committee took the view that there was practical difficulty in finding
led to a committee of inquiry, as explained below. While some modifica- enough private sector job analogues for making job-for-job comparisons,
tions to the qualification benchmarks and the top segments of the Master
and that frequent pay level surveys to adjust to external relativities would
Pay Scale (MPS-which applies to most civil service grades) were cause inevitable disruption to internal relativities and upset civil service
recommended, the principles and methodology underpinning the pay 7
stability. In practice, since the 1989-90 pay structure reviews, and up
structure remained unaltered.
until most recently, the government had not asked for and the Standing
The essential characteristic of the civil service pay system should Commission had not initiated any pay level surveys, although annual pay
have been a regular review of the salary level of various civil service trend surveys had continued to be carried out. As a result, pay relativities
grades as compared to private sector pay for comparable work. Owing to with the private sector have become eroded, particularly since the
methodological problems and difficulties in determining private sector outbreak of the Asian financial crisis in late 1997, when the Hong Kong
analogues, as well as the tedious and laborious nature of such a survey, economy began to undergo a significant downturn, causing rapid pay cuts
only one pay level survey was conducted. In May 1986, after widespread
to be made by many private companies, while civil service pay rates
agitation arose within the rest of the civil service for salary adjustments, remained untouched.
following the government's award of a special pay rise to directorate staff
based on a directorate pay survey, the Standing Commission commis-
sioned Hay Management Consultants (Hong Kong) Ltd. to conduct the Pay Structure and Pay Advisory Bodies
first pay level survey of non-directorate staff. The methodology and The general pay scales now in operation within the Hong Kong civil
findings of the Hay survey were, however, disputed by the civil service service are (Civil Service Bureau, 1998):
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164
Public Service Reform in East Asia
8. Civil Service Pay Reform in Hong Kong
165
• Directorate Pay Scale;
• Directorate (Legal) Pay Scale; Strengths and Weaknesses of the Existing Civil Service
• Master Pay Scale; Pay System
• Disciplined Service Pay Scales (Commander, Officer and Rank
and File);
Stability and Objectivity of the Pay Determination Regime
• Police Pay Scale;
• Independent Commission Against Conuption Pay Scale; The basic strength of Hong Kong's civil service pay system resides in the
• Model Scale I (for manual labour grades); principle of comparability. One may argue that, in the absence of a
• Training Pay Scale; competitive market for government outputs, comparability with the
• Technician Apprentice Pay Scale; and private sector represents the best possible way of bringing about the
• Craft Apprentice Pay Scale. indirect operation of some "market discipline" on civil service pay. More
importantly, it helps the government to maintain competitiveness vis-a-vis
Apart from the directorate officers, members of the disciplined services the private sector in terms of staff recruitment and retention. For want of
(including the Police and the Independent Commission Against Conup- other criteria, comparability has the advantage of arriving at pay levels
tion) and the staff of manual and apprentice grades, the great majority of that can be accepted as fair in principle by both civil servants and the
civil servants belonging to the 410 general and functional grades in the general public. A pay system premised on a relatively "objective"
government are remunerated according to the Master Pay Scale. comparison with market rates and internal relativities also provides
Four independent bodies advise the government on matters relating to system stability and a regime of reasonable expectations, so that civil
pay and conditions of service. Their membership is drawn from the servants know what to look for without organizing pay talks or engaging
private sector, with the inclusion of some academics. The Standing in industrial mobilization, without wasting time and energy on incessant
Commission on Civil Service Salaries and Conditions of Service advises bargaining and confrontations in the absence of any agreed framework
on the principles and practices governing· the pay and conditions of and methodology.
service of all non-directorate staff, except those in the judicial and However, stability and predictability come at a price. While the "fair
disciplined services. The other three bodies, providing advice on the pay comparison" principle represents a neat and tidy method by which to
and conditions of the directorate, the judiciary and the disciplined determine civil service pay, it has been under increasing strain, principally
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services, are, respectively: the Standing Committee on Directorate because it does not guarantee comparable levels of performance. The fact
Salaries and Conditions of Service, the Standing Committee on Judicial that quite a number of civil service grades do not have private-sector
Salaries and Conditions of Service, and the Standing Committee on counterparts also means that their pay is not really determined by a fair
Disciplined Services Salaries and Conditions of Service. Heads of the comparison with the market, but by means of maintaining certain
disciplined services remain under the purview of the directorate body. historical internal relativities within the civil service, a process that is
Until December 200 I, separate secretariats existed to render research and subjective and bureaucratic, rather than objective and scientific, in nature.
administrative support to these pay advisory bodies. These have now been Inasmuch as comparability can provide a workable basis for civil service
amalgamated into a Joint Secretariat for the Advisory Bodies on Civil pay settlement, it has also frequently given rise to disputes and conflicts
Service and Judicial Salaries and Conditions of Service, staffed by civil among civil service grades, as they compare themselves with one another
servants. The Pay Survey and Research Unit of the Joint Secretariat and with private sector employees, though the scale of such conflicts is
undertakes the annual pay trend surveys. still smaller than if the whole process were open to collective bargaining.
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8. Civil Service Pay Reform in Hong Kong 167
Problems of Comparability
their staff, as remuneration is determined by a centralized process outside
As in the previous British system, where the principle of comparability the managers' influence, without regard to actual staff performance. The
emerged out of the main concern "to make sure that civil service pay did only tool available to them is promotion. However, promotion is a poor
not fall behind that in booming ... industry, so that it was still possible to substitute for a more direct kind of reward such as pay, since, on the one
attract good recruits to the public service" (Megaw Committee, 1982: Vol. hand, promotion opportunities are generally limited and do not make
2, para. 4.33), Hong Kong had also seen a similar trend during the period much impression on those members of staff who are complacent and not
from the 1970s up to the 1990s, when civil service pay was basically keen on career advancement (especially if they have already reached the
trying to catch up with the private sector in times of rapid economic maximum pay point of their salary scale), and, on the other hand,
growth. Civil servants felt aggrieved when the government did not appear promotion is not the most appropriate reward for the satisfactory per-
to make comparisons with the private sector in a way which they thought formance of an employee in his or her present rank (cf. Peter's Principle).
fair and proper, e.g., with regard to survey methodology, the definition Relying on promotion as the key staff motivator would give rise to an
and choice of job factors to be taken into consideration in job compari- unnecessary proliferation of higher ranks as a means to improve career
sons and job evaluation, the sample size, the identification and selection prospects.
of suitable private sector job analogues, etc. 8 They were also aggrieved
when the government did not act fully on the result of fair comparisons Problems ofRelativities
out of budgetary or macroeconomic considerations. 9
While civil servants complained about being underpaid, private sector Although conducive to pay stability, internal pay relativities can also be a
employers, on the other hand, accused the government of overpaying civil potential source of pay grievances and disputes. Internal comparison has
servants and exerting undue pressure on private sector pay levels. They historically constituted part of an employee's sense of pay equity, and
were critical of the government's practice of "backdating" annual pay internal relativities in the civil service often constitute the only basis for
adjustments, as this might result in civil servants receiving a greater pay establishing pay levels for those members of staff who do not have a
increase than was warranted by the current economic performance during comparable external c-ounterpart. Disturbing historical relativities would
cyclical downturns. Civil servants countered that they, in tum, lagged in effect mean a "market devaluation" of some grades and ranks, leading
behind private sector employees during periods of economic boom. to disputes and morale problems. For example, following the 1988 Rennie
A more persuasive criticism by private sector employers was that, Committee review of disciplined services pay, which recommended
whereas their employees earned a pay rise by increasing productivity and significant structural changes, upsetting previously existing pay relativi-
contributing to greater company profits, civil servants simply received ties among various disciplined services, there was uproar from the staff
automatic salary increases by virtue of being linked to the private sector. associations concerned. The subsequent remedial pay revisions proposed
To them, this was neither fair nor cost-effective, as civil servants were in by the newly established Standing Committee on Disciplined Services
effect paid for their job rather than for their performance. The civil Salaries and Conditions of Service in 1990, in tum, were greeted with
service practice of granting annual increments on top of pay trend dismay, when those services which had earlier gained from the Rennie
adjustments was also criticized on similar grounds. review found the post-1988 relativities being readjusted to their disadvan-
tage. The Police Force was subsequently able to secure a pay package
') Problems of Management even better than their pre-Rennie position, by arguing for a special status
as the government's "agency oflast resort."
A pay system based on external comparisons deprives civil service
managers of an important tool for improving performance on the part of
168
Pressures for Change and Reforms after 1997

downsizing and pay cuts. Press editorials have largely been in favour of
reducing and reforming civil service pay. The fact that the government in
International Trends Singapore, a city state always used for comparison with Hong Kong,
decided in October 2001 to reduce the salaries of ministers, members of
Since the 1990s, as more concern is focused on public sector reform, the
parliament and senior civil servants, put further pressure on the SAR
pressure to link civil service pay with performance is growing. Interna-
government. Liberal Party chairman James Tien, the legislator represent-
tionally, reforming the civil service pay system is almost a worldwide
ing the Hong Kong General Chamber of Commerce, and a former
trend. In OECD (Organization for Economic Cooperation and Develop-
member of the Chief Executive's Executive Council, has been a key
ment) countries, for example, "there have been efforts ... to gain tighter
advocate of drastic pay cuts in order to bring civil service pay levels in
control over pay costs by changing the methods of determining general
line with the private sector.
pay increase (e.g. elimination of indexing, reduction of the role of market
comparison, removal of pay linkages among different groups of public
servants) and the rules for individual pay progression (e.g. giving less Fiscal Pressure
weight to length of service as a criterion for pay progression)" (OECD,
1995a: 58). Until the outbreak of the current economic crisis, the government was in a
very healthy fiscal condition. There was no financial pressure to conduct
a reform of civil service pay, as had been experienced by some OECD
Domestic Economic and Public Pressure countries in the 1980s and 1990s. Although the SAR government
continues to hold an enviable level of fiscal reserve, to the order of some
Domestically, in the aftermath of the 1997 Asian financial crisis, Hong
HK$350 billion, budgetary deficits are becoming a matter of serious
Kong has experienced an economic downturn of a scale unseen in three
concern within the government. In a document released by the former
decades. In terms of economic prospects, light is yet to be seen at the end
Financial Secretary to legislators and the press in December 2001
of the tunnel, as another global recession, triggered by the us economic
(Finance Bureau, 2001 ), the rigidity of public expenditure was high-
slowdown, has loomed large, and the bursting of the dot. com bubble has
lighted, underscoring the point that the staffing costs (salaries, allowances
created a new crisis among newly industrialized Asian economies,
and staff-related expenses such as pensions) of the civil service and
including Taiwan, Singapore and Hong Kong. In the midst of the eco-
government-subvented bodies, whose pay packages by and large were
nomic recession and the uncertainties this brings, the public is increasingly
linked to the civil service, together took up some 70 per cent of the
questioning whether the civil service still provides value for money.
operating expenditure and 58 per cent of the overall expenditure of the
The private sector has responded to changing market conditions
government in 2000-01. In other words, if public expenditure were to be
quickly, by means of downsizing and wage cuts. As the pay gap widens
reduced at all to alleviate budget deficits, something had to be done about
between the two sectors, and as public expectations of civil service
the pay bills. Earlier, to follow up an Audit Commission criticism, the
performance continue to go up, the cost-efficiency of the civil service is
Civil Service Bureau had decided to freeze the rates of all job-related
cast into greater public doubt. On top of this, repeated reports of civil
allowances and to withhold approval of new claims for six months (Civil
service sleaziness, incompetence and poor supervision and management, Service Bureau, 2001).
unveiled by the Audit Commission's value-for-money studies over the
In his 2002-03 Budget, Antony Leung announced a medium-range
past few years, have impressed on the public the idea that, while civil
budgetary strategy, whereby the real growth in government expenditure
servants are generally well-paid or even over-paid, their performance and
over the next 5 years would be capped at an average of 1.5 per cent per
cost-efficiency do not match the level of their remuneration and fringe
year, with such growth restricted further to 1 per cent per year in money
benefits. The business sector has persistently called for public sector
terms, against a forecast GDP annual growth of 3 per cent in real terms
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170 Public Service Reform in East Asia 8. Civil Service Pay Reform in Hong Kong 171
(Leung, A. K. C. 2002: para. 45, 66 and 72). The objective was to restore
entry and exit arrangements, conduct and discipline, to pay and conditions,
the government's operating account from structural deficit to structural
performance management and training and development. As far as pay
balance, by means of severe expenditure control measures, given the
and conditions were concerned, the document reiterated the existing pay
economic uncertainty and the political difficulty of raising taxation 10
principles, but put forward three specific initiatives: to conduct a starting
Leung also warned that the government would review both the demand
for services and its priorities for the deployment of resources: salaries review; to consider how elements of performance-based reward
systems could be progressively introduced into the civil service; and to
Departments will streamline procedures, simplify structures and economize consider whether the pay trend survey mechanism could be modified and
on manpower in order to release resources to meet additional needs. Fur- improved to make it compatible with a performance-based system (Civil
thermore, we will make use of market forces and strengthen our co-
operation with the private sector to provide better and more efficient ser- Service Bureau, l999a: Ch. 3).
vices to the public through various means (Leung, A. K. C. 2002: para. 71). At a motion debate of the Legislative Council on 9 June 1999, the
then Secretary for the Civil Service, Lam Woon-kwong, addressed staff
It is clear that downsizing and pay cuts have become very much priority
and legislators' concerns regarding performance-related pay, by undertak-
issues on the government's agenda.
ing to analyse carefully the experiences of other organizations, as well as
In his bid for re-election, Chief Executive Tung Chee-hwa pledged to
civil services overseas, in designing Hong Kong's own models. He said
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restore fiscal balance by 2006-07, the final year of his second term. This
!: that the administration would proceed cautiously, by implementing trials
formed the basis of the government's overall fiscal strategy. He and his
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in selected areas to ensure that the system was workable, practicable, and
former Financial Secretary both reiterated this target in the 2003 policy
generally acceptable, before extending it to other areas (Civil Service
address and budget speech respectively (Tung, 2003a: paras. 47-50; Bureau, l999b: 8).
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Leung, A. K. C. 2003a: paras. 57-59) although it was subsequently
postponed to 2009-09 when the present Financial Secretary Henry Tong
i!! Review mid Reduction of Civil Service Starting Salaries
took over. As· a result, the government must find means to tackle civil
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In response to pressure from the business sector and some public opinion,
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:i Chief Executive Tung Chee-hwa stated that civil service pay levels
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~ Pay-Related Initiatives After 1997 should in principle be broadly comparable to those in the private sector,
~ and, in his 1998 policy address, pledged "to carry out a detailed Bench-
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i! Civil Service Reform Consultation mark Review to determine whether or not civil service pay at the crucial
t entry point is still in step with the equivalent pay levels being offered in
J In response to public pressure to reform the civil service, and in line with the private sector" (Tung, 1998: para. 167). In October 1998, the Civil
I
' global trends, the government issued a consultation document on civil Service Bureau commissioned the Standing Commission to conduct a
~' service reform, entitled "Civil Service into the 21st Century" (Civil civil service starting salaries review. This review of recruitment ranks
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l! ! Service Bureau, l999a). In the document, it admitted that found that starting salaries were higher than the market levels by between
6 and 31 per cent for various grades (Standing Commission on Civil
... the public have not been happy with the handling of a number of spe-
cific incidents by the Government. There are also criticisms that the effi- Service Salaries and Conditions of Service, 1999). As a result, the
ciency of certain departments has to be improved. We take public opinions Standing Commission recommended, and the government subsequently
seriously and are determined to look for ways to further improve the Civil accepted, that the benchmark salary for almost all "qualification groups"
Service (Civil Service Bureau, 1999a: para. 1.2). at the entry level should be lowered by one to 6 salary points. For
The proposed reform package covered a wide range of issues-from example, the new salary point of an Executive Officer II, a degree-level
rank, was brought down from MPS 17 (HK$22,075) to MPS 12
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(HK$17, I 00). This reduced salary level, however, remains higher than the assessment of staff performance (covering conduct, diligence and
average market salary for a university graduate, which is currently around efficiency aspects) (Civil Service Bureau, 2000a: 6-7). A civil servant
HK$9,000--1 O,OOO.n The salaries of all serving civil servants are, who received a 5th- or 6th-level overall rating in the performance
however, not affected by this review. appraisal-defined variously in staff appraisal forms as "less than
In order to ensure the continuing broad comparability between the adequate," "unsatisfactory," "poor" and "very poor''-would normally
starting salaries of civil service and private sector jobs requiring similar have the increment stopped or deferred until the next incremental date,
qualifications, and to eliminate the enlarging effect of the annual pay when another review takes place. Those members of staff receiving
trend survey at the starting pay level, 12 the Standing Commission has also "moderate" ratings would be duly cautioned. However, no quota for the
recommended the de-linking of the benchmark/entry pay from the annual granting, stoppage and deferment of increments has been set service-wide.
pay trend survey. From now on, a full benchmark review will be con-
ducted every three to four years, to ensure that the benchmark is in line Pilot Scheme ofTeam-Based Performance Rewards
with the private sector, with annual updating being carried out on a more
selective basis during the interim years (Standing Commission, 1999: Promotion has become the principal means of rewarding merit in
para. 5.3). performance in a system with a fixed salary scale, in which the manager
has no say over the actual remuneration of members of staff. With the
Regulation on the Granting ofAnnual Increments establishment of self-financing trading funds in selected departments (e.g.,
the Post Office) in the mid-1990s, although trading fund managers cannot
:! The existing system of annual increments was originally designed as a allocate bonuses to those members of their staff who are still employed on
performance-based system. This is clear from the wording of Regulation civil service terms, some kind of team-based bonus has been adopted to
451 of the Civil Service Regulations, which states that "an officer may be reward staff in kind, for instance, in the form of supermarket coupons and
granted increment only if conduct (including fidelity, obedience to orders, an annual dinner, on an agency-wide basis, upon the meeting of prede-
propriety) and diligence (meaning steady application, attentiveness to termined performance targets.
duties and industry) in the year under review have been satisfactory" As a way to pursue the idea of progressively introducing some form
(Civil Service Regulation 451, my emphasis). In addition, regulation 452 of performance-related pay, a pilot team-based performance reward
,,, provides for the stoppage and deferment of increments. Over the years, scheme was introduced in the first half of 2001. Departments would join
ii however, managers in the civil service have largely deviated from this the scheme voluntarily, with the agreement of the members of staff
: !!i
! ,11 original intention, and have instead treated the granting of increments as concerned. A team-based reward system helps to avoid the problem of
being almost automatic, paying no attention to the actual performance of subjectivity in appraisal, and to promote team effort. In measurement
members of staff, for whom the annual increment is tantamount to terms, government activities, very often involving teamwork, can be more
another pay rise in addition to the pay trend adjustment. As a result, staff easily evaluated on a collective, rather than on an individual basis. Staff
have generally taken annual incremental progression as guaranteed until members of selected outstanding teams of the departments involved in the
they reach the maximum point of their salary scale. scheme will receive a reward, set at about half the officer's monthly
In line with the direction of civil service reform, the government has substantive salary. Participating departments design their own schemes to
now realized the importance of linking annual increments to performance. suit their management needs, select the units to participate in the scheme,
The Civil Service Bureau has since instructed all managers to follow formulate their own performance targets, and decide on the detailed
more strictly the requirement of the Civil Service Regulations, and to be assessment criteria for bonus allocation, subject to meeting some broad
vigilant in the application of Regulations 451 and 452, so that each parameters (Civil Service Bureau, 2000c: 4). In order to ensure that the
incremental jump in salary would be granted on the basis of a conscious pilot scheme is conducted fairly and equitably, outside consultants are to
r
;,
174 Public Service Reform in East Asia

175
be employed to offer advice and assistance to the Civil Service Bureau
and participating departments. Participant departments have to fund the A Phase One Interim Report was published in April 2002 (Task Force,
reward scheme using their own departmental budgets, e.g., by utilizing 2002a), together with the findings of the consultancy study completed by
efficiency savings obtained from implementing the "Enhanced Productiv- PwC Consulting Hong Kong Limited, for public consultation. In Septem-
ity Programme" introduced throughout government in late 1998 (Civil ber, the Phase One Final Report, in which recommendations were made
Service Bureau, 2000b: 4). for the short, medium and long term, was submitted to the Secretary for
Six departments, including the Home Affairs, Housing, and Buildings the Civil Service (Task Force, 2002b). The recommendations were as
follows:
Departments have taken part in the pilot scheme since October 2001,
while others, notably Social Welfare, Education, and even such business-
In the short term:
i like departments as the Post Office, have decided not to join. Whether
team-based performance rewards will be extended service-wide will • To devise a practical framework and methodology for conducting
depend on the government's evaluation of the pilot experiments. a pay level survey, and to review the pay trend survey methodol-
ogy;
• To consider the adoption of appropriate interim measures for the
!I Review of Civil Service Pay Policy and Pay System and annual civil service pay adjustment exercise pending the outcome
il
1
11
the Latest Pay Disputes of the above review.
~!il
il Task Force on Civil Service Pay Review In the medium term:
!!I • To consider the feasibility of introducing elements of perform-
At the invitation of the Secretary for the Civil Service, the three advisory ance-related pay and fle.xible pay ranges to civil servants, pref-
bodies on civil service pay set up a Task Force in January 2002, to review erably in the senior tier (directorate level) initially;
the civil service pay policy and pay system (excluding the salaries of the • Should such initiatives prove feasible at the senior level, to con-
judiciary, which were subject to a separate review). Following the sider extending the application of the new arrangements through-
government's advice, the review was to be conducted in two phases. out the civil service;
j II'
Phase One involved an analytical study of recent developments and best
I • To adopt the consolidation of job-related allowances as a target,
I',I
1,:
practices in pay administration in other countries, on the basis of which as part of a move towards a "clean wage" policy in the long run
·~ recommendations would be made as to the scope, methodology and (i.e., all allowances and perks to be abolished or consolidated into
, 1~, timing of a comprehensive review, to be undertaken in Phase Two. The basic salary).
I! Task Force examined recent civil service pay reforms in five countries-
~
Australia, Canada, New Zealand, Singapore and Britain-and focused its In the long term:
study on five aspects:
• Gradually to decentralize pay administration to departmental
II managements, to allow departments greater freedom to manage
I
• Pay policies, pay system and pay structure; pay arrangements to suit their needs.
I'I' • The experience of replacing fixed pay scales with pay ranges;
• Pay adjustment system and mechanism; These proposals were not warmly received by the staff side, who har-
i!I • The introduction of performance-based rewards; and boured suspicions about the government's pay policy intentions and
~' • Simplification and decentralization of pay administration. doubts about the feasibility of performance-related pay and flexible pay
ranges. Departmental managers were equally worried that too much
flexibility would create differential treatment, that in tum would have a
176
Public Service Reform in East Asia 8. Civil Service Pay Reform in Hong Kong
177
detrimental effect on teamwork and staff morale.
(Hong Kong General Chamber of Commerce, 2003).
After sitting on the Task Force Report for some six months, the
Following the decision to suspend the 2003 annual pay trend survey,
Secretary for the Civil Service finally decided to proceed with a pay level
the government was left with the alternatives of either to wait until a
survey and to review the pay trend survey methodology. Two committees
comprehensive pay level survey had been completed before making any
were set up in April 2003-a steering committee to oversee the two tasks,
adjustment to civil service salaries, or to negotiate with the staff side on
and a parallel consultative with staff side representatives to act as a
channel for employee consultation. an acceptable rate of adjustment. Eventually, it opted for a negotiated
settlement first, to be followed by a pay level survey, which could then be
allocated more time to be completed. The settlement reached-enabling
Pay Cut Disputes civil service salaries to be frozen in 2003 and then cut in two stages, by 3
The 2002 annual pay trend survey indicated, after allowing for reduction per cent on average from 2004 and another 3 per cent from 2005 (the so-
called "0-3-3" package}-was seen as a political climb-down by the
to reflect the payroll cost of the annual increment, net downward adjust-
ments of 1.58, 1.64 and 4.42 per cent for the lower, middle and upper government in the face of staff-side pressure. Although it was hailed as a
success that would complement its strategy to achieve fiscal balance by
salary bands respectively. Instead of simply freezing civil service pay as
I in the past when negative pay trend indicators were obtained, the 2006-07, the government was widely criticized for appearing to be weak
in the way they dealt with the staff unions, while being unduly harsh with
II government decided to go ahead with pay cuts. Being advised by its own
lawyers that pay reductions would lack sufficient legal force in the
absence of legislation, the government opted to introduce pay cut
recipients of social security benefits, which were cut at one stroke, by
11.1 per cent, in 2003.
Ir legislation. This triggered a strong reaction from the staff side. Some
I
I
II
union leaders were opposed to a pay cut of any sort, claiming reasonable
expectations of employees in a system where salaries were paid on fixed
scales and had never been subject to reduction before, while others were
against using legislative means to reduce pay, as this would create a
Civil Service Pay Reform: Constraints and Paradoxes
It is clear from the above discussion that the major concerns in the civil
service pay debates relate to the cost of the civil service (whether it is too
~
r
dangerous precedent that might be applied to other civil service benefits,
high vis-a-vis the market and in terms of the fiscal burden it imposes on
the government) and to the efficiency and productivity of the civil service.
such as pensions. The pay cut bill was passed in July 2002, with heated
lf However, any moves towards civil service pay reform in Hong Kong
debates in the legislative chamber, and after civil servants and their
~ supporters had arrived in huge numbers to protest. Staff relations were
have to confront conceptual, political, institutional, legal and technical
constraints.
I severely damaged and morale much threatened. The government's
I credibility also suffered.
I Business pressure on the government to make further cuts in civil Rigidity of the Existing System
service pay continued to mount, however. In February 2003, the Hong
The rigidities of the existing pay system lie in the slow process of pay
Kong General Chamber of Commerce published the summary results of a
adjustment in response to changes in the market, as well as in the lack of
pay level survey, which it had commissioned management consultant firm
flexibility in the structure of the remuneration system. The existing civil
Watson Wyatt to complete, to compare government jobs and their private-
service pay system is premised on objective "pay comparisons" (whether
sector equivalents. It concluded that cash compensation for the civil
in the form of the annual pay trend survey or a more comprehensive
service was 17 per cent higher than for the upper quartile of the private
grade-by-grade pay level survey), which are accepted as credible by both
sector, and if the cost of benefits (but excluding housing and education)
the administration and the staff side, and which by and large are regarded
was added, the average total remuneration would be 40 per cent higher
as fair by the general public. Unlike the private sector, it is impossible for
,
..
the government simply to reduce civil service salaries unilaterally in the private sectors; but this is exactly what the government has been doing
event of any economic downturn. To do so would be regarded by the staff over the past several years. Not only that, but unlike certain other
side as destroying the whole spirit of the Whitley system of formal staff countries, such as Singapore, all remuneration within the Hong Kong civil
consultations and the 1968 agreement, probably causing irreparable service, apart from job-related allowances, is treated as basic salary. As
damage to staff relations. The only way to create room for consideration civil servants' pay is increased in line with the annual pay trend survey
of pay adjustments is to initiate regular comprehensive pay level reviews, findings and the incremental pay progression allowed by the salary scale,
in order to readjust civil service pay in line with the new lower levels of their basic salary is also pushed up, which at the same time increases their
private sector pay prevalent in the market. This takes time and patience, retirement pension, that is calculated according to their final salary. This
as well as proper consultation with the staff side. all adds to the pay bill of the government.
For over 16 years, the government has not conducted any compre-
hensive pay level review, despite its being recommended by the Burrett
Political Constraints
Committee of Inquiry that it be regularly undertaken every three years.
No reason for this has been offered by the government, though it is As civil service pay stays well above the market levels, while private
possible that the serious pay disputes with the staff side over the method- sector employers quickly push down wages in response to deteriorating
ology and findings of the 1986 pay level survey, conducted by the Hay economic conditions, the government has been reluctant to undertake any
Management consultant, had made the government reluctant to go comprehensive review of the pay level of incumbent civil servants. The
through similar exercises again. Instead, only the annual pay trend last salary structure reviews (not strictly pay level surveys) were con-
surveys have been conducted. This was not too much of a problem in the ducted in 1989-90. In the final years leading up to the 1997 handover, the
booming economy that existed before 1997, where the civil service was British administration was concerned that any major review of civil
essentially in the process of "catching up" with private sector pay. One service pay might trigger undue anxieties among civil servants and
may even suggest that, without frequent pay level reviews, the annual pay conflicts between the government and the staff side, which would be
trend surveys would not be able to capture the full impact of the escalat- detrimental to the morale and stability of the civil service, at that time the
ing private sector pay levels, fuelled by wealth inflation and a tighter only pillar of continuity and stability in the Hong Kong administration.
labour market in certain job categories. However there was still rough After the handover, the new SAR government, consisting essentially of
justice as far as pay comparability was concerned. the same top mandarins, although headed by a Beijing-appointed Chief
In the depressed economy that came into being after the Asian finan- Executive, was initially equally reluctant to meddle with civil service pay
cial crisis, things were totally different. Private companies acted quickly scales, for fear that this would create an uproar among civil servants, who
to cut operating costs and to take advantage of a labour market where regarded their pay level as being protected by the Basic Law (more
supply exceeded demand to push down employees' salaries. Pay levels discussion on this to follow). 13
have therefore fallen rapidly. If the government continues to follow the Politically, while the business sector is keen to see civil service sala-
pay trend surveys without the benefit of a comprehensive pay level ries cut, trade unions and pro-grassroots political parties (including the
review, a serious anomaly will occur, whereby, even if the private sector two main popular parties of opposing political orientation-the Democ-
is able to award pay increases on the basis of a deflated pay level for most ratic Party and the Democratic Alliance for the Betterment of Hong
jobs, if the government were to adopt similar pay increase rates, it would Kong), and legislators have been sceptical of any such move, for fear that
be topping up a non-deflated pay level which was no longer compatible a downward adjustment of civil service pay in the name of following the
with that of the private sector. Simply following the outcome of the pay market might in turn trigger a further depression in the overall wage level
trend survey in adjusting civil service salaries upward or downward at a 14
in the market. As the public sector includes some 350,000 employees
flat rate would not eliminate the existing pay gap between the public and (170,000 in the civil service and the rest in other public-sector and
subvented-sector organizations, such as schools, universities and social reason why the staff side has now come around to accepting such a
services agencies, which are broadly linked to civil service pay and survey is that the recently agreed "0-3-3" phased pay cuts will bring civil
conditions), any pay cuts are likely to result in the deflation of the service pay to the 1997 level, and the government has already indicated
consumption power of a considerable proportion of the population, with that there would be no further cut for those civil servants employed prior
adverse consequences for an already fragile economy. Public sector staff to the handover, in recognition of the Basic Law protection.
unions are also suspicious that the government, under pressure from
business, would try to use the worst economic moment to launch a Constitutional and Legal Constraints on Civil Service Pay Cuts
comprehensive review, in order to justifY a drastic reduction in civil
service pay and to achieve a cheaper government. The fact that the The room available for pay cuts is also constrained by legal and constitu-
government has not adopted any pattern of regular pay level reviews, tional complications. The SAR's Basic Law stipulates that
irrespective of market conditions, does not help to banish such a conspir- Public servants serving in all Hong Kong government departments, includ-
~
acy theory. ing the police department, before the establishment of the Hong Kong Spe-
In 1999, as pressure for pay reviews built up, the government was cial Administrative Region, may all remain in employment and retain their
only prepared to review and reduce the starting salaries of new recruits, seniority with pay, allowance, benefits and conditions of service no less fa-
vourable than before (Basic Law, article 100, my emphasis).
but left .the salaries of all serving staff untouched, thus adopting a
' "1,.•
''
',, "stabilizing the old-timers, changing the newcomers" strategy. Its hope at Such provision adopts the exact wording of a similar clause in Annex I of
that time was that the economy was bottoming out, and that it would see a the 1984 Sino-British Joint Declaration on the future of Hong Kong,
rebound in a few years' time, which would then push up private sector intended to reassure all civil servants that their job security and pay and
pay levels and accordingly narrow the pay gap, so much so that a benefits would not be adversely affected by the change of sovereignty and
comprehensive pay level review would become less urgent or, if con- government. It seems highly likely that the Basic Law drafters had not
ducted, would not result in any drastic cuts of civil servants' pay. This anticipated the possibility of a serious economic downturn ,that would
hope has not been realized. The new round of global recession has put erode pay comparability between the civil service and the private sector.
Hong Kong's economy back onto a sliding track, rendering a strategy of However, once written into the Basic Law, the provision has the effect of
buying time no longer practicable for the government. providing a constitutional safeguard on civil service pay levels, to the
There seems little doubt that, whether in terms of the integrity of the extent that civil servants may argue that in no way can their pay be
existing pay system or public sentiments, there is insurmountable pressure reduced to a level lower than that which prevailed at the time of the
to conduct a proper pay level review, to bring civil service pay closer to establishment of the SAR, i.e., 1 July 1997. The year 1997 marked the
!; the depressed market level. However, an equally pertinent issue is height of Hong Kong's economic boom, before the bubble burst with the
whether there exists sufficient political capacity to cope with the conflicts impact of the Asian financial crisis in December of that year. Civil service
that might arise from the politics of pay cuts, something never before salaries, even if brought down to 1997 levels, would still be considerably
experienced in the Hong Kong civil service. The strong reaction from the higher than the present deflated market levels. While there have been
staff side to the July 2002 pay adjustment legislation to implement the suggestions in some quarters that this Basic Law provision should be
results of the annual pay trend survey was a case in point. Only after interpreted in terms of purchasing power rather than cash value, the
much political hassle, as noted in the previous section, has the govern- government has already taken a legal position in favour of the latter
ment finally resolved to prepare civil servants for a comprehensive pay interpretation (Civil Service Bureau, 2002: paras.18-19).
level survey to be conducted in the near future, following the Task Force In addition, the government's room to manoeuvre has also been con-
Review of the three pay advisory bodies and the latest decision to set up a strained by legal considerations of a different kind. The employment
steering committee and staff consultative group for the purpose. The arrangements for a civil servant are governed by the provisions set out in
~'
I -~ .
·cr·,·.
~ ~;;~·
lit'
\<
a letter of appointment and the Memorandum on Conditions of Service

service and private sector pay levels, the government will not be able to
(MOCS) attached thereto. Although the standard MOCS provides that the
do anything about the pay of the bulk of its staff who were recruited
government reserves the right to alter any of a civil servant's terms of
prior to July 1997. Hence, the government has resorted to a freeze on
appointment or conditions of service, the government's legal view was
civil service recruitment (Leung, A. K. C. 2003a: para.62), introducing
that "this variation clause in most MOCS now in force does not expressly
voluntary retirement and the appointment of temporary staff on non-civil-
reserve the right to reduce the salaries of civil servants," and there is 15
service terms, and at the same time contracting out more public services
therefore a risk that a decision to reduce pay without legislation could be
in order to achieve the objective of expenditure control.
made the object of a successful legal challenge (Civil Service Bureau,
2002: para. 20). This explained the need for the 2002 pay adjustment to
be legislated, in order to implement pay trend survey results. The Difficulty in Implementing Performance-Related Pay
legislation's constitutionality was challenged by a few individual civil
servants with the support of some staff unions, who brought the case to In the 1999 Civil Service Reform consultation document, the government
court. To their disappointment, the Court of First Instance which heard put forward the idea of introducing some form of performance-related pay
the case ruled in favour of the government, noting that system. It was argued in the document that:
the Executive has sought legislation to reduce civil service pay not in order The existing system of increments in the civil service pay scale is not
to meet a "target figure" which had been unilaterally calculated as being closely linked to performance. Under the existing system, the reward for
fiscally prudent and which, in relation to the existing mechanism for ad- good performance comes through accelerated promotion. But promotion
justing pay, was entirely arbitrary but instead to reduce that pay entirely in prospects are highly dependent on the individual grade's or department's
accordance with the existing mechanism and with principles long accepted vacancy situation and does [sic] not provide a major incentive for all staff
by both the Executive and the representatives of the civil service, one of (Civil Service Bureau, 1999a: para. 3.3)
those principles, indeed a founding principle, being the need for a "broad
~~' comparability" between private and public sector pay (Justice Hartmann, . While linking pay to performance in the civil service is becoming a
2003: para. 57). growing international trend, there exist both practical and political
difficulties in implementing a fully-fledged performance-related pay
The court concluded that Article 100 of the Basic Law, as an article system in Hong Kong.
of constitution, was not worded in such rigid terms as to direct that pay,
In practical terms, the reliability of any performance-related pay sys-
allowances and benefits may not for any reason, in terms of specific
tem remains complicated by methodological problems, and negative
figures, fall below those bestowed on 30 June 1997. So long as the
attitudes, prejudice and cynicism on the part of management (Cheung,
previous "system" of pay and conditions was not altered to be less
:1, 1999). A performance-related pay system only works if the "perform-
favourable than before, the relevant constitutional provisions were not
I
,)
I
breached.
At the time of writing, this case is still under judicial appeal. But in
ance" of individual civil servants can be reliably measured by objective
indicators which are acceptable to both staff and management. Otherwise,
performance evaluation will tend to focus on those aspects of work which
any case, the Chief Executive has impressed the staff side that his
are technically easier to recognize and measure, overlooking the impor-
il· government would not reduce civil service salaries to below the 1997
cash levels. tance of non-quantifiable aspects (the so-called "intangibles"); or
performance indicators might tum out to be just "political products" of
J! The combination of various political, constitutional and legal prob-
bureaucratic bargaining between staff and managers, making the system a
lems has resulted in only a limited downward adjustment of civil service
mockery and adding to "transaction costs." Unlike the private sector,
salaries. Even if a comprehensive pay survey is carried out and its
where performance can ultimately be assessed in quantifiable terms and
findings confirm that there remains a significant disparity between civil
monetary currency, government work often involves team-based and
-:;~~
184
··r·····-·'·
quality- or process-oriented perfonnance, which does not lend itself to
introduce performance pay and that this must be handled very carefully
simple measurement. (Civil Service Bureau, 1999b: 7).
If managers are risk-averse, as a large number of middle-level
managers are, they may tend to play the "nice boss," by adopting an The tightened system of granting annual increments should help to
egalitarian approach, attributing equal merit to their staff and rewarding emphasize the importance of perfonnance, but only in cases where
them more or less equally in tenns of perfonnance-related pay. Some members of staff have not yet reached their maximum salary point. The
managers may accord more importance to hannonious staff relations than recent pilot scheme involving team-based perfonnance rewards should be
to differentiating between the perfonnance of different members of staff. given a try to see how this might help to encourage better perfonnance.
Others may resent a perfonnance-related pay system which entails more However, the fact that some big departments, such as Social Welfare and
work, in tenns of perfonnance measurement documentation, more office Education, have decided not to join the scheme, underlines the worry of
politics and less staff trust. In any case, a perfonnance-related pay system some departmental senior managers about the potential divisiveness of
which lacks the whole-hearted support of middle managers is unlikely to such bonus payments, and the practical difficulties of perfonnance
measurement and evaluation. Feedback from departmental managers and
work effectively. Indeed, many middle managers tend to take a cynical
view of such a system, whereas junior staff are sceptical of the system staff representatives alike during the 2002 Task Force review indicated
because they fear subjective and arbitrary evaluation by supervisors who continuing scepticism of the merits and workability of performance-
related pay arrangements.
are prejudiced or who favour their proteges. Furthennore, perfonnance-
related pay is not necessarily a more effective perfonnance motivator
than other aspects of the work situation. For example, an OECD study Room for Pay Reform
conducted in 1997 found that, for many public sector managers, job
independence, a sense of accomplishment, challenging work, and In light of the problems identified and issues encountered, any refonn of
respect aJ1.d fair treatment were deemed more important motivators than Hong Kong's civil service pay system must address three fundamental
perfonnance-related pay (OECD, 1997a). issues: pay principle, pay detennination methods, and public acceptability
of the system.
All these concerns were voiced by civil service staff unions and
commentators when the suggestion to introduce a perfonnance-related
pay system was made in the Civil Service Refonn consultation document. Pay Principle-External Comparison and Internal Relativities
As the Civil Service Bureau subsequently admitted, upon assessing the
The "fair comparison" principle of the civil service pay system has never
feedback received during the consultation period, while
been questioned by either civil servants or the public. It has been regarded
[t]here is general agreement on the principle that there should be correla- as an essentially fair principle. Most of the disputes have centred only
tion between performance and pay; ... there is widespread reservation and upon the putting into practice of that system. In the absence of a more
scepticism on the feasibility and practicability of introducing performance
pay in the civil service. Some have pointed out that unlike the private sec- credible principle, and in order to avoid incessant pay negotiations and
tor where there could be clearly defined performance targets based on conflicts, particularly in the context of Hong Kong, where collective
business results, there are no easily quantifiable yardsticks by which civil bargaining has not been a common practice, it is still preferable to have a
servants' performance could be assessed, and in the absence of such yard- pay system for the civil service whereby pay detennination may be
sticks, the authority for determining performance pay might be abused. carried out on the basis of objective surveys and measurements. Besides,
Some also refer to experiences overseas and note there are few, if any,
it is debatable whether any alternative system would result in fewer
success stories. The general view is that it is important to establish a fair
and equitable performance assessment mechanism before proceeding to conflicts and uncertainties.
What needs to be changed, however, is, rather, the present highly
unified nature of the pay regime, in the sense that all non-directorate civil
''0';::''
-~
186
Public Service Reform in East Asia ~
187
servants, other than the disciplined services, irrespective of grades, are
aligned to a uniform salary structure in the form of the Master Pay Scale. worth considering dispensing with the annual pay trend survey, and
As all the grades involved are linked to one another in a complex network instead using a comprehensive pay level survey as the basis of four- or
of internal relativities, the system has become unduly rigid, so that five-yearly adjustments, while pay levels are kept stable in the interim
years.
changes made to some grades will by convention or pressure result in
similar changes being made to the linked grades. Sometimes, because of In terms of adjustment mechanism, it can of course be argued that a
the concern regarding implications for internal relativities, the govern- market-driven pay determination system might be linked to other
ment tends to be too cautious in its adjustments to the pay scale of economic indicators, rather than relying on a complicated process of
particular grades which might be facing real market pressure for such an comparison with private sector job analogues. For example, civil service
adjustment. It is time that the existing centralized civil service pay scales pay levels could be indexed directly to economic performance (such as
be gradually disaggregated, in order to facilitate more flexible and the GDP growth rate), or to the cost of living as measured by the con-
devolved reward management based on departmental and specialization sumer price index (CPI). Either method would have the advantage of
features, and to make it easier for the pay levels of some civil service jobs providing an objective and stable system of pay determination. The
to be adjusted in line with changing market trends, without triggering downside to this idea is that private sector pay levels do not necessarily
unnecessary intra-civil service adjustments simply for the sake of follow GDP or CPI trends. For example, it could well be the case that,
maintaining some historical relativities that are difficult to justifY in the despite low inflation, some large private firms will continue to reward
present market circumstances. In the long run, the simplification and de- their staff by significant pay rises based on good business performance. If
layering of the civil service grading structure are essential to help create a civil servants feel they are falling behind their private sector counterparts
flexible regime that can be made more responsive to changing market in terms of pay levels, there will be discontent and a brain-drain from the
conditions and external circumstances. public sector, particularly if more civil servants in future are to be
employed on contract terms, as proposed by the 1999 Civil Service
Pay Determination and Pay Progression Reform document (Civil Service Bureau, 1999a: para. 2.7). Conversely, if
civil servants are given a pay rise to take account of the increasing cost of
The present system of fair comparison with the private sector through pay living, while private sector employees do not enjoy the same level of
level and pay trend surveys is a reliable method, provided the government adjustment because of the poor performance of their company, there will
is committed to conducting pay level reviews on a more frequent basis. be public accusations of unfair pay awards.
The best way is to fix the frequency of such reviews, say once every four Nevertheless, Hong Kong could consider following Singapore's ex-
to five years, irrespective of economic conditions at the time, in order to ample, by splitting civil service pay into two components-a stable basic
reduce arbitrariness in the choice of review timing that might favour pay element, and a variable pay element that is linked both to market
either the staff or the administration as employer. Continuing with the fluctuations as measured by the regular pay reviews and, if some form of
existing pay comparison methodology also has the advantage of retaining performance-related pay system is introduced, to staff performance. Such
a system that has already been well tried, and that has gained broad a combination will have the advantage of providing basic stability, but at
acceptance by the staff side and the public at large. Hong Kong's econ- the same time allowing some flexibility. Any variable pay arrangement
omy is likely to have to face more fluctuations in the future, rather than need not be implemented across the whole civil service. A distinction
the continuous growth and price inflation that characterized the several may be made between senior and junior ranks, with the latter being given
decades before 1997, where civil servants' pay had to be consistently more fixed pay scales in recognition of their greater need for income
increased to catch up with the private sector. Since this is the case, in stability. To provide more flexibility within the pay scale, in order to link
order not to have to go through the frequent exercise of pay cuts, it is pay more closely with individual performance, pay ranges with only the
minimum and maximum salary points fixed could be introduced for
188
senior staff at the directorate level, so that instead of simply relying on the
annual increment system to reward performance, pay movements within To ensure that civil service pay levels keep closely to market levels,
the pay range may be used as a more effective tool to encourage better pay level reviews must be more regularly conducted. In light of the
performance and to discourage under-performance. 16 present constitutional and legal constraints on pay cuts, a clear legal basis
Furthermore, the proliferation of job-related allowances of various for civil service pay adjustment, whether upwards or downwards, has to
kinds payable to civil servants over the past few decades, which has been be established once and for all. Instead of one-off legislations, a Civil
l a target of criticism by the Audit Commission, has to be stopped. Service Pay Adjustment Ordinance that sets out the system of pay
\·
i Allowances should be reduced in number and streamlined. Those which determination and the mechanisms used for pay reviews and adjustments
t remain should be consolidated into the basic salary as far as possible. will be necessary. Given the government's acceptance of a 1997 bottom
d
. i: line for downward pay adjustment, the question remains whether the
!! Public Acceptability majority of civil servants, who were recruited prior to 1997, will, after the
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II current "0-3-3" phased pay reductions, enjoy only pay rises and no more
l' Public acceptability of any civil service pay system is built upon the pay cuts throughout the rest of their service. One way to get around the
1
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efficiency and fairness of that system. Hong Kong's existing civil service Basic Law restriction might be to introduce a parallel system of pay and
pay system is fair and efficient, in terms of paying civil servants the conditions of service that is more in line with the private sector, so that
prevalent market rates (hence efficient), and no less than those rates in when "protected" civil servants are due for promotion, they have either to
order to recruit and retain people of good calibre (hence fair). The system transit to the new system or to stay put in their existing rank.
is also transparent and accountable, in terms of adopting open and Finally, one should not assume that the pay system can provide all the
objective pay assessment criteria based on private sector data. However, incentives for good performance or all the answers to the problems of the
the system may not be efficient, since civil servants are paid the same civil service. In terms of staff motivation, one should not lose sight of
rates as their private sector counterparts on the sole assumption that they non-monetary incentives (such as better career development and im-
areas productive as the latter, something that has to be demonstrated, proved working environment and practices) and other value ingredients
rather than taken for granted. Also, if the system is so rigid that compre- (such as job satisfaction, sense of achievement and social appreciation).
hensive pay level reviews fail to be conducted frequently enough to To achieve an efficient, productive and streamlined civil service, non-pay
ensure fair comparability with the market, the private sector and the measures, such as structural changes, de-layering, the modernization of
public as taxpayers may question the overall fairness of the system. work procedures and job reviews should also be used.
To address the problem of value-for-money, it is incumbent upon the
government to embark on a more vigorous programme of performance Notes
evaluation-not necessarily for the sake of using quantification and
measurement to form the basis - of remuneration or extensive bonus 1. The three pay advisory bodies are: the Standing Commission on Civil Service
payments, in view of the multifarious technical and managerial problems Salaries and Conditions of Service, the Standing Committee on Disciplined Ser-
discussed above, but in order to reassure the public that cost-efficiency and vices Salaries and Conditions of Service, and the Standing Committee on Direc-
torate Salaries and Conditions of Service. These advisory bodies subsequently set
performance monitoring are indeed key elements of civil service reward
up a Task Force to conduct the review as requested by the govemment.
management. There must be mechanisms whereby those under-performing
2. It was explicitly recommended by the 1988 Committee of Inquiry (Surrett
civil servants are given negative rewards, such as stoppages of increments Committee, 1989: paras. 6.18-6.19) that the govemment should bring up the
and even pay reductions (which may be facilitated if a variable element is upward adjustment of the lower pay band to the same extent as that of the middle
introduced into the salary structure as suggested above), not to mention pay band, should the pay trend indicator for the lower band be found to be below
disciplinary penalties in serious cases of negligence. that of the middle band.
3. Normally taking place between January and May, the pay trend survey covers a
.:·.z
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1:
190
,,
12-month period from 2 April of the previous year to 1 April of the current year.
rate increase of 15 per cent to all civil servants on grounds of budgetary con-
Private-sector companies participating in the survey are asked to provide infor-
straints, and for fear that higher public expenditure would fuel inflation. The
mation about changes in basic salaries on account of cost of living, general pros-
same reasons were put forward by the government to justify, for a second time,
perity and company performance, general changes in market rates and in-scale
lower-than-pay-trend salary increases in May 1991. On both occasions, the
increment as well as changes in cash payments (e.g., merit pay and bonus) other
government had the apparent support of the general public, who were also
than those relating to fringe benefits for employees in the respective salary bands.
increasingly concerned about the rising cost of the civil service. As a matter of
i, The information is then collated and analysed, according to a methodology
li policy, the government has always maintained that in determining civil service
~ agreed by the Pay Trend Survey Committee with members drawn from the pay
pay adjustments, it also takes into account factors other than the pay trend survey
i! advisory bodies and civil service staff side bodies, to produce gross pay trend
findings, such as changes in the cost of living, the state of the economy, budget-
i indicators (PTI) for the three salary bands. Gross PTis are then adjusted by a
ary considerations, the staff side's pay claims and civil service morale.
~ reduction factor to take account of the value of civil service increments at their
10. Although the government's Advisory Committee on New Broad-based Taxes
!!I payroll cost (expressed as a percentage of the total payroll cost for each salary
recommended the introduction of a Goods and Services Tax and other new levies,
band), to produce net PTis, on the basis of which government would make pay
I adjustment decisions. A total of 91 private companies (out of 98 companies in-
the business sector has strongly opposed any new taxation, saying that new taxes
would only be considered after the government has made genuine efforts to cut
vited to participate in the survey), covering 130,854 employees, were included in
down the size of the civil service and public expenditure. See comments made by
the 2001-02 pay trend survey (Pay Trend Survey Committee, 2002).
Eden Woon, executive director of the Hong Kong General Chamber of Com-
4. The qualification system makes a comparison of educational qualifications in
merce, reported in Wen Wei Pao, 24 February 2002.
setting starting pay benchmarks, with other relevant factors such as age, qualifi-
11. This disparity is mainly due to the fact that pay survey methodology uses large
cations over and above the minimum, required experience, and recruitment and
private firms as the survey sample and the third quartile figures (not the mean or
retention difficulties taken into account in determining salary levels (Standing
medium figures) for the purpose of pay adjustment.
Commission, 1979: paras. 25, 36, 39 and 41).
12. In the past, pay trend survey findings were also used to determine the adjustment
5. The First Report on Salary Structure Review, published by the Standing
of starting pay. This is problematic because those data collected from private
Commission in October 1989, reviewed civil service pay policy and reaffirmed
companies in the pay trend survey refer essentially to the adjustments made to
the education qualification system. The Second Report in April 1990 made ad-
the pay of existing employees, which reflect the need for employee retention,
justments to the Master Pay Scale and revised the salary structure for some indi-
rather than to the pay of newcomers, which is geared towards the need for re-
vidual grades, while the Third Report iri January 1991 made recommendations on
cruitment. During periods of economic downturn, when there is a relatively large
the revised salary structure for the remaining individual grades.
supply of new recruits, assuming the pay trends of the two types of employees to
6. Hay Consultants adopted the factor-point ')ob evaluation" method, under which
be equivalent would have the effect of unnecessarily inflating the pay level of the
a representative sample of civil service jobs was compared with a similarly rep- new recruits.
resentative sample of jobs in the private sector, based on three elements, namely
13. The civil service reform initiated by the SAR government in March 1999 was
know-how, problem-solving and accountability. Such an approach was chal-
partially halted by mid-2000, with the removal of the then Secretary for the Civil
lenged by the staff side, which criticized the method as being highly subjective
Service, Lam Woon-kwong, to the Home Affairs portfolio, and his replacement
and as ignoring other important factors, such as physical effort and working con-
ditions. by the more conciliatory Joseph Wong, when drastic reform proposals created
much resentment from middle and junior civil servants, who saw the reform as a
7. According to an internal paper of the Joint Secretariat for the Advisory Bodies on
threat to their job security and career prospects and took to the streets to protest
Civil Service and Judicial Salaries and Conditions of Service, February 2002.
against the government in repeated rallies and marches. For more discussion, see
8. Pay disputes over the Hay Consultants' study in 1986, described above, are a Cheung (2001).
case in point.
14. The pro-grassroots parties and pro-labour legislators only came to a political
9. For example, in April 1990, although the pay trend survey findings indicated that
consensus with the other parties in the so-called "seven party groups agreement"
pay increases of 16.56 to 18.25 per cent were awarded in the private sector dur-
in February 2003 to allow government to reduce civil service pay to the July
ing the preceding survey period, the government was only prepared to offer a flat
1997 level when it had become clear to them that the government was faced with
192 Public Service Reform in East Asia
serious structural deficits and there was growing public demand for such pay cuts.
In the event, it was Cheng Yiu-tong, leader of the pro-government Federation of
;I Trade Unions and also member of the Executive Council, who led the govern-
PI
ment's negotiations with the civil service staff side and managed to persuade
I them to agree to phased pay reductions in 2004 and 2005.
15. From 1999-2000, because of the government's decision to freeze new recruit-
ment for most civil service posts, departments have been allowed to employ
temporary staff on non-civil service conditions. Such terms and conditions are
entirely at the discretion of heads of departments so long as they are not less
favourable than those provided for under the Employment Ordinance, or more
favourable than the mid-point salaries of the equivalent civil service ranks. Ac-
cording to the Secretary for the Civil Service, the total number of these members
of staff amounted to 16,240 in December 2002 (Wong, 2003). While giving de-
partments a more flexible means of obtaining manpower, staff working on non-
civil service conditions also cause problems of a lack of loyalty, high turnover,
and wasting of training resources.
16. Under the annual increment system, staff can only move in a progressive manner.
Pay reduction along the scale is normally reserved as a penalty for disciplinary
cases. The advantage of a pay range is that salary movements within the range
are allowed to recognize the actual performance of members of staff, so that the
salary point can move either upwards or downwards between the maximum and
minimum points.
,,'I
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'ii

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8- - - - - - - -

Civil Service Pay Reform in Hong Kong:

rendering the service more flexible, motivated, proactive and responsible

Pressures for Change and Reforms after 1997

174 Public Service Reform in East Asia

a letter of appointment and the Memorandum on Conditions of Service

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