[Blind Conservative Disclosure] Executive Compensation Disclosure Fails to Reflect Changed Reality... Financial Authorities to Revise

FSS Requests Service for Executive Compensation Disclosure Reform at Capital Research Institute
Currently, Individual Disclosure of Annual Salaries for Listed Company Directors with Over 500 Million KRW
Disclosure Standard 'Earned Income' Makes Accurate Compensation Assessment Difficult

Financial authorities have begun a full-scale overhaul of the disclosure system for compensation received by major shareholders and executives such as directors of listed companies, including commissioning research projects to research institutions. Under current law, directors of listed companies with an annual salary of 500 million KRW or more must disclose their salaries individually. However, since the disclosed salary is based on taxable earned income and does not include specific details of stock-based compensation, it has been pointed out that it is difficult to accurately grasp the executives' exact compensation.

According to the financial investment industry on the 17th, the Financial Supervisory Service (FSS) recently commissioned the Korea Capital Market Institute to conduct a research project on reforming executive compensation disclosure. A senior official from the financial authorities said, "There are shared concerns regarding executive compensation, so we are reviewing the issue, but no specific direction for improvement has been determined yet," adding, "Regarding Restricted Stock Units (RSUs), the authorities' stance is to preserve the positive aspects while addressing the problematic points."

The country that the financial authorities refer to as a benchmark is the United States. The U.S. introduced executive compensation disclosure regulations through the Securities Act of 1934 and the Securities Exchange Act of 1934. Subsequently, the U.S. Securities and Exchange Commission (SEC) detailed the regulations on compensation disclosure, and after the 2008 global financial crisis, the Dodd-Frank Act was enacted, requiring more accurate and detailed disclosure of executive compensation. Accordingly, the disclosure must specifically include the relationship between compensation and performance, as well as the ratio of employee-to-executive pay gaps.

In contrast, in South Korea, for executive compensation disclosed in business reports, directors with an annual salary of 500 million KRW or more must disclose their salaries individually, and since 2018, the average annual salary per non-registered executive has been separately disclosed. However, since the disclosure standard is based on income under the Income Tax Act, performance bonuses paid in stock are recorded as income (salary) in the year the exercise gain occurs. This means there is a time lag between the actual salary of the relevant year and the disclosure. Additionally, the correlation between executive compensation and performance is not clearly revealed, which is also cited as a problem.

The receipt of compensation from multiple affiliated companies is another area needing improvement. Currently, if an executive of a company also serves as an executive of another company, the fact of concurrent positions must be disclosed, but compensation received from other companies, including unlisted affiliates, does not have to be disclosed.

As compensation systems that reward performance with stock, not just cash payments, have expanded, the need to strengthen the management of stock-based compensation disclosure has also increased. The stock-related performance compensation system recently under controversy is the RSU. Typically, the mandatory holding period for RSUs ranges from 3 to 10 years. Unlike the existing performance bonus system that pays cash immediately at year-end or beginning, RSUs are a long-term performance compensation system requiring holding for up to 10 years before stock is granted. This means the company is offering stock as collateral for its future value instead of immediate cash compensation. Although similar to stock options, which grant the right to purchase stock, RSUs differ in that the company directly grants its stock. However, concerns have been raised that RSUs, which have no restrictions on recipients or quantity, could be abused as a means of corporate succession.

Professor Changmin Lee of Hanyang University's Business Administration Department pointed out, "Under the Commercial Act, controlling shareholders are prohibited from receiving stock options, but there are no regulations regarding RSUs, which are similar in nature."

In the political arena, voices have emerged calling for amendments to the Commercial Act to ensure that RSUs operate transparently and in line with their original purpose while preserving their positive functions. In September last year, Rep. Yongwoo Lee of the Democratic Party of Korea introduced a bill to institutionalize RSUs. The bill aims to prohibit the granting of RSUs to the largest shareholders and their special related parties of listed companies and to require shareholder meeting approval for their issuance, similar to stock options. Reflecting these concerns, the FSS revised the disclosure format at the end of last year to mandate sufficient disclosure of stock-based compensation information to investors.