[Job Performance Bonus Solution] ① Multinational Companies Choose China Over Korea... "Korea is the Graveyard of Job Performance Bonuses"

Seniority-Based Wage System Dominates...The Graveyard of Job Performance Pay
High Wage Burden and Rigid Structure in Korea...A Barren Land for Investment
Same Pay for Same Job?..."Increase the Weight of Job and Skill"

Editor's Note'Labor reform' is a sensitive issue in the Korean economy. Both conservatives and progressives, as well as companies and workers, recognize its necessity, but due to its complexity and sensitivity, meaningful reforms have not been achieved over the past decades. President Yoon Seok-yeol has made labor reform the government's top priority. With low growth becoming a reality amid aging and low birth rates, the message is that labor reform can no longer be postponed. Flexibility in working hours, restructuring of the wage system, and establishment of rule of law in labor unions are pressing tasks of our time. However, reforms always face opposition from vested interests. Especially, wage restructuring represented by job-based performance pay is a matter directly connected to workers' lives, leading to divided opinions not only among large labor unions but also the general public. Asia Economy deeply analyzes the opinions and misunderstandings surrounding job-based performance pay across various social sectors to explore what kind of wage system suits our economy and society.

"Korea is a 'graveyard' when it comes to job-based performance pay. Many companies in China have already adopted job-based pay, and companies like Tencent have a job-based performance pay system stronger than those in Korea or even Silicon Valley in the U.S. From the perspective of multinational corporations, they have no choice but to invest in China instead of Korea, where wages are high and rigidity is significant." (Executive from a global accounting and consulting firm A)

Low Growth Becomes Full-Fledged... Change to 'Job-Based Pay' Inevitable

As forecasts suggest that Korea will enter a low-growth phase with growth rates in the 1% range starting this year, calls for a complete overhaul of the country's wage system, represented by the seniority-based pay system, are growing louder. Due to low birth rates and aging, companies' growth potential continues to decline, making it difficult to maintain the seniority-based system where wages automatically increase with years of service. Especially, Korea is known globally for having a strong seniority-based wage system, which has recently caused significant difficulties in attracting manufacturing companies to resolve supply chain instability.

Job-based performance pay is a wage system that differentiates salaries based on the value and performance of the tasks workers perform within an organization. The seniority-based pay system increases base pay annually regardless of job or performance, so workers performing different tasks receive the same pay if their years of service are equal. However, job-based performance pay reflects the characteristics and performance of the tasks assigned to the worker, allowing them to receive reasonable compensation proportional to their work. This also strongly motivates workers to engage in self-development and performance creation.

In Korea, several companies have already introduced wage differentiation based on job and performance since the early 2000s, but the seniority-based system still accounts for a large portion of total wages compared to other countries. According to the Ministry of Employment and Labor's supplementary survey on workforce in June last year, the operation rate of seniority pay and skill-based pay accounted for 13.7% across all industries, while job-based pay was only 10.8%. In large companies with labor unions of 1,000 or more employees, seniority pay was overwhelmingly high at 80.6%, while job-based pay was 34.5% and skill-based pay 23.3%. The higher the market influence of the company, the higher the proportion of seniority pay.

Same Pay for Same Grade?..."China is Different"

In the past, when Korea was in a rapid growth phase, the burden from the seniority-based pay system was not significant. However, as growth rates have sharply declined recently due to global supply chain restructuring and accumulated trade deficits, calls for the introduction of job-based performance pay have increased. As the domestic and international economic situation worsens, corporate profits stagnate, but wages continue to rise regardless, making the current structure unsustainable. Industry insiders also point out that Korea's rigid wage system, which is rare globally, reduces the attractiveness of investing in Korea for multinational corporations.

Professor Lee Sang-min of Hanyang University's Department of Business Administration said, "As Korea enters a low-growth phase, companies will need new growth engines. In addition to what has been done so far, they must act as global players, and small and medium enterprises must innovate and achieve high quality to grow into strong companies. The current seniority-based wage system has limitations in terms of performance rewards and motivation."

For example, in Chinese manufacturing companies, if sales and research and development (R&D) jobs receive a wage of 100, purchasing jobs receive 80. In Korea, due to the strong culture of hiring new graduates, most employees receive the same base pay regardless of job. In terms of performance, Chinese purchasing managers receive relatively significant rewards or penalties based on performance indicators such as material cost ratios, but Korean purchasing managers typically do not receive appropriate compensation even if they achieve results like reducing contract costs. This leads to dissatisfaction in certain job roles, which eventually results in decreased productivity.

In fact, China has a more flexible wage system based on job and performance than Korea, which, combined with lower labor costs, has further promoted foreign investment. An executive from a global accounting and consulting firm told Asia Economy, "If you visit companies in China, it is natural for employees in the same grade but different jobs to have salary differences. The companies currently dominating China have established job-based performance pay, and some companies even have stronger compensation systems than American companies."

The Bund (Waitan) along the Huangpu River in Shanghai, China [Image source=Yonhap News]

Breaking Rigid Wages is Key to Attracting Global Companies

Recently, with the Russia-Ukraine war and intensified U.S.-China conflicts shaking global supply chains, many believe that labor market structural reforms, including wage reforms, are prerequisites to activating 'reshoring' (the return of overseas manufacturing companies to the domestic market), which is trending worldwide. According to the Korea Employers Federation, over 90% of Korean companies operating overseas are negative about returning to Korea, citing high labor costs as a major reason. A representative from the Federation emphasized, "The high-wage system centered on seniority pay must be restructured into a job- and performance-based system that corresponds to productivity improvement."

Especially, due to experiences with COVID-19 lockdowns, rising labor costs, and conflicts with the U.S., global 'SoBuJang (materials, parts, and equipment)' companies with operations in China are increasingly moving away from China. If labor reform is properly implemented, Korea could successfully attract these companies. Korea is geographically close to the 'big market' of China, has relatively advanced technology and SoBuJang ecosystems, and is culturally and religiously stable, but high labor costs, rigid employment environments, and aggressive labor unions are cited as drawbacks.

Multinational corporations' Korean branches sometimes face pressure from headquarters regarding personnel adjustments due to Korea's unique wage system. Low-tenure employees receive wages around 50, while department heads with lower performance receive wages exceeding 100, which is difficult for headquarters, where job-based pay is the norm, to understand. A representative from a global pharmaceutical company explained, "There is an aspect where headquarters do not understand Korea's uniqueness of wages increasing with seniority and try to adjust personnel accordingly."

Professor B, a former public member of the Minimum Wage Commission who requested anonymity, said, "Personnel management is connected from hiring to retirement and has historical context, so the wage system cannot be changed abruptly in isolation. Therefore, rather than trying to change everything at once, efforts to gradually reduce the proportion of seniority and length of service and expand the value proportion of job and skill should be considered improvements."