It was right after the 1997 IMF crisis that performance bonuses began to be introduced in earnest at domestic corporations. The government actively encouraged their adoption to reduce labor costs stemming from the seniority-based pay scale.
Recently, as semiconductor corporations such as Samsung Electronics and SK hynix have posted record profits on the back of a global boom in artificial intelligence (AI), performance bonuses have solidified into multimillion-won high salaries. That runs contrary to the original intent.
In particular, controversy is growing after the Samsung Electronics union, following a strike notice, agreed to receive 10.5% of operating profit as performance bonuses for the next 10 years. Questions are being raised over whether it is right to distribute operating profit as performance bonuses to employees when operating profit should be paid out as dividends to shareholders or invested in research and development. There is also criticism that performance bonuses should be paid differentially according to each person's contribution, and that paying the same amount to all employees would violate that principle.
◇ Just before the IMF crisis, 1.6% of corporations implemented performance bonuses… gradually becoming universal
In 1996, just before the IMF crisis, only 1.6% of domestic corporations ran an annual salary system that included performance bonuses. That ratio gradually rose to 23% in 2000, 66.2% in 2013, and 77.8% last year. The performance bonus method has become universal among domestic corporations.
One background factor was the government's push to introduce U.S.-style performance bonuses. The aim was to link wages to performance and results to catch two rabbits at once—corporate restructuring and employment stability—to overcome the IMF crisis. The view was that leaving the existing seniority-based pay scale intact would keep labor costs high and prevent corporate performance from improving.
Even then, there were concerns that performance bonuses would become fixed pay. Unlike the United States, in Korea the dismissal of regular employees was effectively impossible and large unions had strong bargaining power. There was also criticism that corporations had not established clear standards to accurately evaluate employees' performance.
In fact, when the Korea Labor Institute (KLI) surveyed nine firms that introduced performance bonuses in 1998 and then stopped, responses cited concerns that "performance bonuses could become fixed pay" and that "the expected effects did not materialize" as reasons for stopping. Most of these firms were found to have unions.
Earlier, the Korea Development Institute (KDI) said in its 1994 report on improving the wage system to enhance wage flexibility that "bonuses are a wage item that changes more flexibly with economic fluctuations than fixed pay," adding that "making bonuses part of base pay is not desirable."
◇ Shareholder backlash to tens of trillions in performance bonuses… concerns about undermining investment funds
On the 20th, labor and management at Samsung Electronics reached a tentative agreement to pay 10.5% of business profit as performance bonuses to employees in the semiconductor (DS) division over the next 10 years. Experts expect Samsung Electronics to post operating profit of 300 trillion won this year. If realized, the special performance bonus pool is expected to reach about 31.5 trillion won.
As this situation unfolds, questions are being raised over "whether it is right to allocate operating profit to performance bonuses." Some argue that not paying out operating profit as dividends harms shareholder interests.
In fact, Min Kyung-kwon, head of the Korea Shareholder Action Headquarters, a Samsung Electronics shareholder group, said that if a board resolution to ratify and execute the union's tentative agreement is tabled, the group will file a lawsuit seeking confirmation of invalidity with the court. On the 21st, the group held a rally near the home of Samsung Electronics Chair Lee Jae-yong, saying, "The tentative labor-management agreement to pre-calculate 12% of pre-tax operating profit and link and allocate it as performance bonuses is illegal," and that "it is legally void unless it goes through a shareholders' meeting resolution process."
There are also calls to use operating profit first as research and development funds to secure corporate competitiveness. It is said that building a single semiconductor plant requires tens of trillions of won in investment. According to U.S. market research firm Semiconductor Intelligence (SC-IQ), this year's capital expenditure (CAPEX) by major semiconductor companies is led by TSMC at $54 billion. Next are Samsung Electronics at $40 billion, SK hynix at $27.4 billion, Micron at $20 billion, and Intel at $17.7 billion.
One expert said, "The semiconductor industry is a field that boosts added value by investing in large-scale facilities and massive research and development costs," adding, "If operating profit generated here is to be paid to employees as performance bonuses, shouldn't each person prove how much they contributed to performance or the company conduct individual evaluations and pay differentially?"