[Business & Issues] The Secret Behind Chairman's Retirement Pay Over 20 Billion Won... Different Rules from Workers

Controversy Over Severance Pay of Samjin Pharmaceutical Founder
Different Severance Pay Rules for Employees and Other Executives
'Snowball' Effect Without Midterm Settlement

Shareholders of Samjin Pharmaceutical, famous as the manufacturer of the painkiller Geborin, are continuing to protest after a disclosure revealed that the company's two co-founders will receive retirement payments exceeding 20 billion KRW. While shareholders criticize that the retirement payments exceed last year's total operating profit of Samjin Pharmaceutical as excessive, the company explains that the payments are in accordance with the executive retirement payment regulations.

In fact, executive retirement payments in South Korea are calculated differently from employee retirement payments. Unlike employee retirement payments calculated under the Labor Standards Act, executive retirement payments are determined based on the Commercial Act and tax laws, considering factors such as annual salary, years of service, and payment multipliers by rank. Especially for founders who have served as chairman for decades without interim retirement settlements since the company's founding, the structure allows for receiving enormous retirement payments.

Samjin Pharmaceutical Founders' Retirement Payments Exceed Operating Profit...Angry Shareholders

According to the semi-annual report disclosed by Samjin Pharmaceutical on the 14th, former Chairman Jo Eui-hwan and former Chairman Choi Seung-joo, who retired in March this year, each received retirement payments of 21.77377 billion KRW. Samjin Pharmaceutical stated in the disclosure that the amount was calculated by multiplying the average wage (106.7 million KRW), length of service, and payment multipliers by rank according to the executive retirement payment regulations decided at the shareholders' meeting.

After the disclosure, voices criticizing the excessive retirement payments have grown louder. Even though former Chairmen Jo and Choi are founders who led and nurtured Samjin Pharmaceutical for over 53 years, there are complaints that the retirement payments exceeding last year's total operating profit are excessive. On Samjin Pharmaceutical's shareholder discussion boards, posts have appeared criticizing the payments as "an amount beyond common sense that infringes on shareholder interests" or suggesting "400 billion KRW should be used to defend the stock price."

Samjin Pharmaceutical maintains that the retirement payments were made from funds accumulated in the form of retirement pensions and thus do not affect performance as they are not expenses incurred at the time of retirement. However, because the retirement payment amount was large relative to the market capitalization, shareholder dissatisfaction poured in. As of the 30th, Samjin Pharmaceutical's market capitalization is approximately 258.7 billion KRW. The stock price, which started at 21,650 KRW at the beginning of the year, has fallen to the 18,000 KRW range. This means that more than 16.7% of the market capitalization was paid out as retirement payments.

Executive Retirement Payment Regulations Differ from Employees...Different from Executive Compensation Limits

The main cause of this controversy is the different standards for retirement payments between general employees and executives. First, general employees' retirement payments are calculated based on the average daily wage, which is the total wage for the three months before retirement divided by the number of working days. The typical retirement payment for general employees is calculated by multiplying the average daily wage by 30, then multiplying by the years of service calculated by dividing the total days worked by 365.

However, executives are different. Corporate executives' retirement payments are calculated by multiplying the average annual salary divided by 10 (i.e., one-tenth of the average annual salary) by their years of service, and then by a payment multiplier according to their rank. The payment multiplier by rank is a number applied when calculating retirement payments based on each executive's internal rank, such as 2x, 3x, or 5x, and varies according to company regulations.

The National Tax Service limits the deductible amount of executive retirement payments under corporate tax law to prevent excessive payments. Amounts exceeding this limit are treated as personal earned income for the retiree and are subject to separate income tax. Since the 2020 legal amendment, the limit is calculated by multiplying one-tenth of the average annual salary, years of service, and a fixed payment multiplier of 2x. If an executive has served since before December 31, 2019, the years of service before that date are multiplied by a 3x payment multiplier, and the years of service from January 1, 2020, onward are multiplied by 2x.

For example, if a CEO with an average annual salary of about 300 million KRW serves as CEO for three years starting in 2021 and then retires, the deductible limit is calculated as 30 million KRW (one-tenth of the average annual salary) × 3 (years of service) × 2 (payment multiplier), totaling 180 million KRW. If the retirement payment exceeds this amount, income tax applies to the excess.

Owners Maintaining Executive Positions Without Interim Settlements...Snowball Effect

The Bank of Korea announced that last year, the gross national income per capita was $33,745, an increase of 2.6% compared to the previous year. The photo shows an employee organizing 50,000 won bills at the Hana Bank headquarters in Jung-gu, Seoul, on the 5th. Photo by Kang Jin-hyung aymsdream@

Founders and owners with very long executive tenures without interim retirement settlements sometimes receive retirement payments far exceeding executive compensation limits. Generally, directors' retirement payments are decided through separate shareholder resolutions according to Article 388 of the Commercial Act, which states, "If the amount of directors' compensation is not specified in the articles of incorporation, it shall be determined by resolution of the shareholders' meeting." Therefore, retirement payments exceeding the executive compensation limits disclosed in business reports can occur.

The two founders of Samjin Pharmaceutical involved in this controversy had a tenure of 53 years and 4 months, or 640 months, so the long-term accumulation of retirement payments combined with the 'Snowball effect' resulted in astronomical retirement payment amounts.

For general retired executives who joined as employees and were promoted, receiving retirement payments in the hundreds of billions of KRW is unlikely. This is because the average tenure of executives at major domestic companies is only about five years. According to a survey by the Korea CXO Research Institute comparing last year's and this year's semi-annual reports of the top 10 domestic companies by sales, 388 identified retired executives had an average executive tenure of only 5.6 years. They were appointed as executives at an average age of 49.6 and retired at 54.2 years old.