[Opinion] Fairness in Performance Evaluation and Compensation

Jinyoung Shin, President of the Korea Corporate Governance Service and Professor at Yonsei University School of Business

Kakao, which had been thriving with record-breaking performance, recently became embroiled in controversy over two hotel accommodation vouchers. In the first quarter of this year, Kakao awarded two-night hotel stay vouchers in Seoul to 72 headquarters employees who were recommended by each division head, regardless of their performance, due to their excessive workload. As soon as this issue became known within the company, it immediately sparked strong backlash from employees. The core of the controversy and criticism lies not in the reward system itself or its scale, but in the lack of transparency regarding the criteria and recipients of the rewards, which were distributed unilaterally without communication with the members.

Since the beginning of the year, large corporations have been struggling with issues related to performance evaluation and compensation. LG Electronics implemented a record-high annual salary increase of 9%, and Samsung Electronics also carried out a 7.5% raise, the largest since 2013. However, employees strongly opposed these increases, citing a lack of transparency in the basis for the raise calculations and individual payment criteria. SK Hynix, despite recording nearly double operating profit of 5 trillion won, faced criticism from employees who could not accept that performance bonuses were paid at 20% of the previous year's salary. This situation escalated to the point where the group chairman, Chey Tae-won, had to intervene. Chairman Chey announced that he would return the entire 3 billion won salary he received from SK Hynix last year, but rumors persist that key personnel turnover may continue.

Employee dissatisfaction with performance evaluations and compensation has led to the establishment of office worker unions within large corporations. Following LG Electronics in February, office worker unions at Hyundai Motor Company and Kumho Tire were launched in April. A notable characteristic of these newly formed office worker unions is that they are led by the 20-30 age group, commonly referred to as the MZ generation. According to a survey conducted among 117 employees who expressed their intention to join the temporary executive committee of the Hyundai Motor office worker union, 88% were in their 20s and 30s.

The core of the younger generation's backlash is 'fairness.' The essence of performance evaluation and compensation is to transparently disclose the evaluation criteria and process so that the recipients can understand and accept them. The root of the problem appears to be that corporate management does not properly recognize this and mistakenly believes that everything is resolved simply by increasing the absolute amount.

In fact, a more serious issue in corporate performance evaluation and compensation is the lack of clear grounds for executive pay. According to recent analysis, among 200 controlling shareholders at the level of group heads in Korea's top 200 conglomerates, 54 do not participate as registered executives of their affiliates, yet they receive higher compensation than professional managers. The average compensation of 30 individuals whose pay was disclosed was about 2.2 billion won, higher than the average of about 1.9 billion won for 85 registered executives. The problem is that there is no reliable evidence that the board of directors has set appropriate payment criteria in advance for the compensation of unregistered executives. This is a very serious disqualification in corporate governance. For this reason, according to the Corporate Governance Association (AGAG), which evaluates corporate governance systems and practices in major Asian markets in its report 'CG Watch 2020,' South Korea still ranks 9th among 12 Asian countries, the same as last year.

This year, an ESG boom is sweeping South Korea. For Korean companies to achieve sustainable mid- to long-term management and enhance corporate value, it is necessary to establish a rational performance evaluation and compensation system at the enterprise-wide level. In particular, unless a performance evaluation and compensation system for controlling shareholders and executives, which is a core issue of governance, is established, the backlash from corporate members regarding performance evaluation and compensation that has occurred in several companies since the beginning of the year will not subside.

[Shin Jin-young, President of the Korea Corporate Governance Service & Professor at Yonsei University Business School]