[Blind Conservative Disclosure] Executive Compensation Disclosure Lacks Effectiveness... Stock Compensation Details Must Be Transparently Revealed

Executive Compensation Disclosure Items Need Specification
Only Total Executive Compensation Approved... Significant Strengthening of Compensation Disclosure Required
Business Community Considers Compensation Committee System Sufficient

Experts say that the calculation system and disclosure content of executive compensation in domestic listed companies are insufficient, and that executive compensation disclosures should be strengthened to verify the linkage with business performance. They also pointed out that as the number of listed companies paying compensation in the form of stock-based rewards such as Restricted Stock Units (RSUs) increases, stock compensation policies and specific details should be transparently disclosed. On the other hand, listed companies argue that executive compensation is directly linked to corporate personnel systems, making detailed disclosure burdensome, and that if disclosure regulations are tightened, there will be less incentive for listed companies to maintain stock-based compensation systems.

Significantly Strengthen Disclosure Content on Executive Compensation Components and Structure

Looking at the details of executive compensation included in business reports uploaded to the Financial Supervisory Service's disclosure system, the shareholder meeting-approved amount (total limit) is disclosed, along with the average compensation per executive and, for registered executives, only the average compensation of the top five executives can be confirmed. Compensation types are broadly divided into salary, performance bonuses, other income, and retirement income, but the compensation payment criteria only provide a general explanation such as "paid by categorizing into basic salary, adjustment pay, etc., according to executive compensation regulations." (From the March 2023 business report of domestic company H.)

Even in the section on calculation criteria and methods, it only states that the total amount was paid by comprehensively reflecting position, rank, and company contribution according to executive compensation regulations. Specific details such as what the executive compensation aims for, how the compensation structure is designed to achieve goals, and what performance evaluation indicators are used are missing.

Seunghee Lee, a research fellow at the Economic Reform Institute, said, "First, the disclosure content on executive compensation in business reports should be significantly strengthened. Currently, there is almost no disclosure other than the components and amounts of executive compensation," adding, "Much more information is needed on the specific calculation of compensation amounts. Also, the disclosure target should be expanded from executives with total compensation over 500 million KRW to all registered executives."

When designing the capital market system, South Korea refers to the United States as a case study. The U.S. has many global companies with numerous listed company executives receiving high salaries, but the executive compensation policies and regulations are correspondingly stringent. Not only are important matters regarding compensation policies and decisions disclosed, but to derive the relationship between compensation and performance, at least three and up to seven of the most important financial performance measures from the recent fiscal year are disclosed.

Hyunyoung Hwang, a research fellow at the Capital Market Research Institute, explained, "In the U.S., the relationship between executive compensation and the company's financial performance must be disclosed," adding, "The relationship between actual compensation paid to executives and Total Shareholder Return (TSR), as well as the correlation between TSR over the past five fiscal years and the peer group TSR, must be disclosed."

There are also opinions that additional disclosures such as overlapping wage receipts should be made to prevent excessive compensation payments. Since executives may concurrently hold positions in holding companies and subsidiaries, but compensation received from unlisted affiliates is not subject to disclosure obligations, this can lead to a lack of transparency.

Changmin Lee, a professor at Hanyang University’s Business Administration Department, pointed out, "Currently, if a company’s executive holds an executive position in another company, the concurrent position status must be disclosed, but it is desirable to also disclose the compensation received from the other company."

Executive Compensation Issues Are Adequately Addressed by Current System... Difficult to Impose Disclosure Obligations for Overlapping Compensation

The business community argues that the current system is sufficient to address executive compensation issues. Regarding the disclosure status of executive compensation in South Korea, many companies already have compensation committees under their boards of directors, so there are no procedural defects. Hyunwook Park, a researcher at the Korea Listed Companies Association Policy Research Team, said, "Many large domestic companies have compensation committees under their boards to decide executive compensation, so formally there are few disqualifications," adding, "However, compared to overseas where ownership is dispersed, controversies are more frequent in South Korea where controlling shareholders exist."

He continued, "Institutional investors such as the National Pension Service actively intervene in agenda items related to directors' compensation limits based on fiduciary guidelines," adding, "Whereas previously only quantitative criteria were considered, now qualitative aspects are also reviewed and voting rights exercised, so it appears that shareholders effectively control through general meetings."

Regarding compensation received by listed company executives who concurrently serve as executives in unlisted companies, there is also an opinion that it is inappropriate to require disclosure obligations. A Financial Supervisory Service official explained, "The business report system is based on the relevant company’s standards," adding, "There is no principle that Company B must disclose how much a person belonging to Company A receives or what work they do."

There is also a stance that disclosing executive compensation is burdensome because it is directly linked to corporate personnel systems. A domestic research institute official said, "Compensation-related matters involve disclosing corporate personnel systems, which are trade secrets," adding, "If companies are found to manipulate stock performance compensation, the market can criticize the company’s backward governance behavior and evaluate it retrospectively."

Increasing Trend of Stock Compensation... Disclosure Related to Stock Compensation Also Lax

There are concerns that caution is needed even when performance bonuses are given in the form of stock compensation. Currently, executive compensation disclosures are based on taxable earned income, so when stock compensation is significant, it is difficult to know the exact total annual salary. In the case of stock options, the fair value at grant is not included in the annual salary; instead, the gain upon exercise is included in the disclosed annual salary of the exercise year. Among stock compensation types, RSUs are most commonly used and represent stocks promised at the grant date to be delivered in the future, with compensation levels varying depending on the delivery timing.

Research fellow Seunghee Lee said, "Since stock compensation is not included in compensation at the grant date and is not subject to shareholder meeting approval, shareholders find it difficult to know the exact compensation including executives’ stock compensation, and it is not included in total compensation, allowing companies to avoid controversy over high compensation payments," adding, "To ensure stock compensation operates as intended, stock compensation policies and specific details including stock compensation should be transparently disclosed and the system improved to allow shareholder participation."

Concerns have also been raised that RSUs could be exploited for management succession by exploiting the fact that they can be paid simply by fulfilling the service period without any particular business performance. This was the reason why Democratic Party lawmaker Yongwoo Lee proposed a bill last year focusing on regulations related to stock compensation systems. Professor Changmin Lee said, "Under the Commercial Act, controlling shareholders cannot receive stock options, but there are no regulations on RSUs, which are similar in nature."

However, the business community views that excessive regulation could hinder the establishment of the system. RSUs have the aspect of incentivizing long-term business performance rather than short-term performance orientation, but if regulations are tightened, more companies may abandon this system. A recent example is Hanwha being embroiled in controversy over RSU misuse, and LS deciding to withdraw RSUs just one year after introduction.

Researcher Hyunwook Park explained, "Although the RSU system is not explicitly stated in law, domestic companies have used it as a more flexible performance compensation system like in the U.S. in terms of treasury stock disposal," adding, "However, unlike the U.S., Korea lacks tax benefits and legal provisions, making it disadvantageous in terms of cost treatment, and cash payments are easier to manage than RSUs."

He added, "Under such circumstances, concerns about misuse for controlling shareholder succession, as argued by the office of lawmaker Yongwoo Lee last year, have increased, and with the Financial Supervisory Service’s announcement last year to strengthen disclosure regulations, companies have less incentive to maintain the RSU system," adding, "Especially if the law is amended as proposed by lawmaker Lee, the flexible utilization aspect of the system could be significantly impaired, raising concerns."