The Boomerang Effect of Salary Increase Competition in the IT Industry

[Asia Economy Reporter Kang Nahum] The competition for salary increases in the IT industry continues this year following last year. Kakao has ignited the spark for the salary increase race, with companies competing to offer double-digit raises. This is due to a chronic shortage of developers, but concerns are also rising that the growth in operating profit this year may slow down due to increased labor costs.

◆ Everyone Competing for Double-Digit Raises = According to the IT industry on the 18th, Kakao announced in February a plan to increase the salary budget for employees by 15%. Namgoong Hoon, CEO of Kakao, also expressed his intention to secure an additional 6% compared to this year for next year. Naver tentatively agreed to a 10% increase in the salary budget through labor-management negotiations on the 2nd. The agreement includes a guarantee of a minimum 3 million KRW raise. They also agreed to increase the individual work support fund from 150,000 KRW to 300,000 KRW.

LG CNS decided to increase salaries by an average of 10% this year, the largest increase in history. The company also raised the starting salary for new employees by 4 million KRW compared to the previous year, to 50 million KRW. Including performance bonuses, the total annual salary for new employees is expected to exceed 60 million KRW on average.

The gaming industry is also joining the salary increase trend one after another. Smilegate recently agreed between labor and management to increase the salary budget by 9.5% compared to the previous year, and Webzen is negotiating between two options: a 10% salary increase or a uniform 10 million KRW raise.

◆ Quit if Not Raised, a Vicious Cycle = The competition for salary increases stems from a chronic shortage of developers. Industry insiders explain that the fierce competition to attract talent forces companies to offer high salaries as incentives. Naver CEO Choi Soo-yeon also explained about the salary increase, saying, "The demand for IT talent is explosively increasing, and it was accepted based on the opinion that a visible salary increase is more important to them."

The increased labor cost burden due to the rise in salary budgets at each company is expected to negatively impact performance again this year, following last year. Game companies that competitively raised salaries last year all recorded poor performance. Due to the largest portion being labor costs, performance deterioration is expected again this year.

◆ IT Industry Faces Risk of Negative Growth = In the case of NCSoft, operating expenses last year increased by 21% compared to the previous year to about 1.9336 trillion KRW, of which 850 billion KRW was spent on labor costs. Labor costs increased by 18% compared to the previous year. NCSoft was confident that the revenue effect from new releases would offset the costs, but ultimately it led to a decline in annual operating profit. For Krafton, operating expenses increased by 39.1% compared to the previous year, with stock compensation costs and labor costs combined amounting to about 520 billion KRW, an increase of about 40% compared to the previous year.

In the securities industry, concerns about negative growth in the IT sector this year are also emerging. According to the earnings consensus compiled by financial information provider FnGuide, Naver is expected to record sales of 1.8789 trillion KRW and operating profit of 344.1 billion KRW in the first quarter of this year. These figures represent a 25.34% increase in sales and a 19.14% increase in operating profit compared to the same period last year, but growth is expected to slow compared to the previous quarter’s sales of 1.9277 trillion KRW and operating profit of 351.2 billion KRW. Kakao’s expected sales and operating profit are 1.76 trillion KRW and 168 billion KRW, respectively, which also show a slight decrease compared to the previous quarter.