6th Bank Sector Management, Sales Practices, and System Improvement TF Working Group Meeting
The financial authorities have decided to promote the introduction of the so-called ‘Say-on-pay’ system, which requires individual compensation payment plans for registered executives of financial companies to be approved at shareholders' meetings. They are also pushing for a plan to disclose the compensation amounts of individual executives, including registered executives and those responsible for business execution.
On the 20th, the Financial Services Commission announced that such measures were discussed at the 6th Working Group meeting of the Banking Sector Management, Business Practices, and System Improvement Task Force (TF), chaired by Vice Chairman Kim So-young at the Government Seoul Office in Jongno-gu, Seoul on the 19th.
At this meeting, they discussed ways to enhance the effectiveness of a system that defers performance-based compensation for executives and financial investment officers and adjusts (malus) the deferred performance compensation upon occurrence of certain reasons. This is to ensure that executives do not focus solely on short-term performance by reflecting long-term performance in performance-based compensation and limiting the pursuit of short-term results.
To this end, the meeting reviewed a plan to adjust the minimum deferral rate from the current 40% to 50% and extend the deferral period from 3 years to 5 years to expand the amount of performance compensation subject to adjustment. Since reclaiming already paid performance compensation carries a high risk of legal disputes, the adjustment of deferred performance compensation, which is relatively more utilized, is made easier.
However, even if the rate or period is increased, exceptions were also discussed to apply the existing standards if the investment holding period has ended, the same effect can be achieved through reclamation, or if the position or compensation is below a certain level.
Additionally, the introduction of the Say-on-pay system to strengthen shareholder control over individual compensation payment plans of registered executives was also brought to the discussion table. For listed financial companies above a certain scale, the plan is to require explanations of individual registered executives’ compensation payment plans at the general shareholders' meeting, providing shareholders with relevant information and opportunities to express their opinions.
The meeting also discussed requiring disclosure in the annual report under the Corporate Governance Act of the total compensation payments for all individual executives, including registered executives and those responsible for business execution (management). The aim is to disclose the total individual compensation, total performance-based compensation, and specific calculation criteria for executives receiving compensation or performance-based compensation above a certain amount, so that stakeholders can directly verify executives’ performance and prevent excessive risk-taking.
The authorities plan to proceed smoothly with these measures as they were included in the amendment to the Financial Company Governance Act submitted to the National Assembly in 2020. Vice Chairman Kim stated, “Although the Governance Act stipulates deferred payment and reclamation of performance-based compensation, domestic banks operate these systems restrictively compared to foreign countries, meeting only the minimum standards,” adding, “For the effectiveness of system improvements, it is important that banks have the willingness to actively implement them.”
Vice Chairman Kim also emphasized, “Not only the performance-based compensation of executives but also special performance bonuses and voluntary retirement payments for employees should be actively monitored primarily by shareholders, who are the direct stakeholders,” and added, “To this end, enhancing transparency through active disclosure of banks’ payment standards and compensation amounts is crucial.”
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