IT services corporations Samsung SDS is struggling over a revamp of its compensation system that would pay bonuses in treasury stock instead of cash. Samsung SDS initially planned to wrap up a vote last month, but extended the voting deadline by a week as some employees continued to push back. Internally, complaints have surfaced that the company is rushing to introduce a pay system that links bonuses to the stock price at a time when a rise in the share price is far from guaranteed.
◇ Samsung SDS holds up-or-down vote on revamp to pay 100% in "treasury stock" instead of cash
According to the industry on the 2nd, Samsung SDS has been holding an up-or-down vote on the personnel system revamp for all employees since on the 24th. The plan will be implemented if a majority votes in favor. It was initially set to close on the 29th, but the company extended the deadline to the 7th to gather more feedback from members.
The core of the revamp is to scrap the existing cash-based bonuses and pay them in treasury stock. Samsung SDS employees have received TAI (target achievement incentive) and OPI (over-profit incentive) twice a year. TAI pays up to 100% of base salary depending on organizational performance, and OPI is a bonus paid based on annual salary when the company achieves profit above its target.
In recent years, Samsung SDS's OPI payout rate has remained below 10% of annual salary. This year's OPI payout rate was also set to be around 6%. Although the company has maintained stable results, the bonus level has been considered low compared with major divisions at Samsung Electronics (40%–50%) and Samsung Biologics (50%).
The revamp scraps TAI and OPI and pays treasury stock once a year. It sets the payment baseline at 20% of annual salary, above the level of recently paid bonuses. Depending on market indicators such as year-over-year pre-tax profit growth rate, the company's stock return, and the stock price growth rate versus peers in the same industry (IT services), a payout multiple of up to two times will be applied. If the stock price rises, additional shares will be granted relative to the contracted share count, there is no lockup period for sales, and an additional 15% will be granted if held for one year.
The revamp was influenced by a Supreme Court ruling in Jan. recognizing the wage nature of Samsung Electronics bonuses. In a severance pay lawsuit filed by former employees of Samsung Electronics, the Supreme Court recognized TAI as wages in return for labor and ruled it must be included in severance calculations. In the industry, Samsung SDS's push for 100% treasury stock payments is being interpreted as a move to block such legal risks.
◇ "Bonus volatility will increase with the stock price… concerns about lower severance pay"
The revamp would raise the bonus baseline from below the previous 10% to 20% of annual salary, effectively expanding compensation. However, there are concerns that volatility could increase because the entire bonus would be paid in treasury stock. That is because external indicators such as the company's stock price growth rate and the growth rate versus peers in the same industry are reflected in the bonus calculation. As a result, the actual size of bonuses could vary with movements in the stock price or industry indexes, regardless of individual performance.
The fact that Samsung SDS's share price has not shown a sharp rise is also fueling employee concerns. As of the day, Samsung SDS closed at 201,500 won, up about 22% from a year earlier (165,000 won). Compared with the Korea Composite Stock Price Index (KOSPI), which rose about 170% over the same period, the gain is not large. There are also concerns that if employees sell shares around the same time after receiving treasury stock, a temporary drop in the share price could reduce the value of bonuses.
The potential for reduced severance pay is also at issue. There are concerns that if TAI, which could be recognized as ordinary wages, is abolished under the revamp, it could affect individual severance pay. Internally, some say severance could differ by tens of millions of won depending on whether the plan is applied.
There has also been friction during the voting process. The task force (TF) leading the bonus revamp has been encouraging participation by sending guidance calls and text messages to employees.
An employee who requested anonymity said, "Because a majority is required, many employees see the company's active encouragement to vote as effectively encouraging a vote in favor," and added, "I understand that in some cases, people are choosing not to vote instead of voting against."
However, Samsung SDS said, "The revamp is intended to raise compensation levels by tying them to the company's profit and corporate value growth, strengthen transparency in compensation standards by using public market indicators, and build a performance-based compensation system," adding, "If a majority of members do not agree, we will not implement the system."