(This essay was published in Hong Kong Economic Journal on 26 April 2017.)


Since the introduction of the system of public accountability for principal officials, a majority of appointed policy secretaries have been recruited from the civil service. Tsang Yum-Kuen drew a large majority of his policy secretaries from the civil service, and some expect our next Chief Executive Lam Cheng Yuet-Ngor will do the same.


There are many reasons for this. Our highly fragmented electoral system nurtures mostly political advocates who claim to be accountable only to the narrow special interests they represent. These individuals often cannot see beyond their own walled communities. They do not fit in well on a governing team that has to serve the broad public interest. There once was a time when our larger political parties still purported to represent a broad spectrum of interests. Today such pretense has mostly been dropped.


Another source of recruiting external talents into government has been the advisory committees system that blossomed during the era of ‘administrative absorption of politics’. The current practice has been to use the system to make partisan and political appointments rather than as sounding board to get input and recruit promising talents. Moreover, it is no longer obvious that such a system is still viable in the present political environment.


The kitchen has become too hot for many prospective policy secretaries. It is now more difficult to recruit external talents to fill political posts if their primary interest is to perform public service. Policy secretaries in Hong Kong do not have the support of political parties that are common in more mature political systems. They can become totally exposed and often have to fend for themselves.


The government therefore faces genuine difficulty in attracting quality leaders to fill political posts. This has led it to the inevitable fallback position of relying on civil servants whose administrative training in balancing partisan interests to serve the public appears to present more reassuring skill sets.


Their only handicaps are they have had no experience in the rough and tumble of election politics and their long bureaucratic career does not equip them with a broader political vision and experience for senior political posts. Training and exposure can make up for part of the deficiencies, but not necessarily all of them. Civil servants cannot and should not perform the work of politicians, so this is a second-best solution.


There is still some potential in identifying talent through the advisory committees. Some of them could be invited to take time off their regular careers to work in official positions on contract terms so as to increase their exposure to government work and public engagement. The Central Policy Unit has provided a home base for some of these recruits; perhaps more such home bases within government could be established. It is an idea worth exploring further.


A competent non-corrupt civil service is a crucial institution in any modern society to assure the efficient delivery of basic public services. Recruiting politicians from within those ranks has become a last resort in Hong Kong. Even here, the rancorous reality of today’s politics means better incentives should be provided to entice capable senior civil servants to serve as policy secretaries and deputy secretaries.


Reintroducing pensions for civil servants (say all administrative officers) would be one such incentive. Pensions are a form of deferred compensation that has the additional benefit of being an in-built deterrence to corruption by reducing the temptation to engage in such behavior.


What is a deferred compensation scheme? It is a scheme whereby part of an employee’s compensation is not received immediately but delivered at a later date. If an employee is found to have behaved improperly while in service, say by engaging in corrupt activities, then he could be disciplined or discharged and, as a consequence, may lose either part or all of the deferred compensation.


In this way, deferred compensation can impose a penalty and induce recipients to refrain from improper behavior. It has been widely employed as a disciplinary-linked tool by governments in many countries, mostly in the form of a pension scheme.


A deferred compensation scheme sets the salary level at below the employee’s productivity when he is young, but above his productivity when he is old. From the point of view of the government employee, he is underpaid when young and will only be able to get the full lifetime value of his work at his retirement date. If he leaves any time before the retirement age of say 60, he will receive less than the full compensation for the full value of his work. Gratuity paid at the end of a fixed term contract also serves the purpose of encouraging contract completion and is analogous.


The significance of deliberately underpaying a government employee when he is young and overpaying him when he is old means that the employee will have to face the threat of a penalty throughout his working life in government should he engage in improper behavior.


Employees obviously will take pains to avoid being caught in such activities  such as corruption. Uncovering such behavior is often difficult because of their clandestine nature. But when such exposure means not only possible criminal charges and loss of reputation, but also loss of deferred compensation, then there is a strong deterrent against engaging in improper behavior.


The deterrent effect becomes weaker as the employee gets closer to retirement age. Pensions are the ideal deferred compensation scheme for governments because they are paid throughout the retirement years. Thus, the deterrent effect does not end upon approaching retirement because the employee would still be under the threat of losing his pension if he was found to have behaved improperly during his working years.


The mandatory retirement element is also an important feature of deferred compensation schemes. If an employee does not have to retire, then the deterrent disappears. For this reason, retirement has to be made mandatory.


However, in order for deferred compensation to work, there must also be a determination to enforce it when required. The willingness to withhold deferred compensation and make it contingent upon proper behavior is critical to its success.


Before June 2000, the Hong Kong civil service had a pension scheme that contained such a disciplinary element. The scheme was abandoned in favor of a provident fund scheme, probably in the wake of the Asian financial crisis and recession as a cost-saving measure and also in the misguided belief that pensions were merely a retirement benefit and an inefficient scheme.


I have always believed this to be a mistake stemming from the failure to recognize the role that a deferred compensation scheme played in disciplining public officers against corruption and misbehavior.


The government’s pension scheme was replaced with a Civil Service Provident Scheme (CSPS) in 2000. Civil servants appointed after 1 June 2000 were offered CSPS, while those appointed prior to this date remained on the pension scheme. The CSPS and the pension schemes have quite different effects on employee behavior. The CSPS does not contain an implicit penalty to deter improper behavior.


Retirement benefits that are vested with the employee such as staff provident funds do not have deterrence incentives built into them. The reason is simple: vested benefits are an entitlement of the employee and are provided without having to be contingent on the employee’s performance. Vesting usually takes place following an initial period of five or ten years of continuous service, after which it becomes the employee’s entitlement. Moreover, such benefits can usually be collected in full upon retirement.


Reintroducing a pension system would significantly increase the commitment and performance of senior civil servants. It would serve as a deterrent against improper behavior. And equally important, it could enhance the incentive of civil servants to take up political posts if their pensions could also be appropriately augmented when they take up political posts.


Will populists in the legislature and a disgruntled public oppose this idea? Probably yes. But I believe it will be better value for money.




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