The Korea Enterprises Federation (KEF), which represents the management side on labor-management issues for some 4,200 member companies in Korea, on Wednesday issued a special recommendation to all its members serving as a "guideline" against union demands for "N% of operating profit" as performance-based pay. The move reflects the federation's sense of crisis over being dragged along by unions through strike pressure in the absence of a clear social consensus on corporate profit distribution.
Samsung Electronics and SK hynix, Korea's No. 1 and No. 2 companies, have already reached labor-management agreements to use 10.5% and 10% of operating profit, respectively, as a source of performance-based pay. Demands for a fixed percentage of operating profit to be paid as performance bonuses are now pouring in across the auto, shipbuilding and information technology (IT) industries, including Hyundai Motor, Kia, HD Hyundai Heavy Industries, Kakao and LG Uplus. The issue carries significant volatility as it overlaps with the summer labor offensive period when wage and collective bargaining negotiations take place in earnest.
At Kakao, the possibility of the first strike since the company's founding is becoming increasingly real. After labor and management failed to reach a settlement in their second round of mediation on the 27th, the union secured the right to legally engage in industrial action. The Kakao union is calling for performance pay equivalent to 13–14% of operating profit, while the company says such a level is unmanageable.
The unions of Hyundai Motor and Kia, which serve as the "elder brother" within the Korean Confederation of Trade Unions and the Korean Metal Workers' Union, continue to demand performance pay equivalent to 30% of net profit and 30% of operating profit, respectively. While the demands have appeared in negotiation proposals every year, union pressure has intensified this year following operating-profit-linked performance pay agreements at Samsung Electronics and SK hynix. Given the ripple effect Hyundai Motor and Kia have on the manufacturing industry, observers say that if the system becomes institutionalized, "N% of operating profit" performance pay will effectively become the "new normal."
In response, the KEF recommended that companies refuse collective bargaining itself, stating that "companies have no legal obligation to comply with union demands to share corporate profits." It also emphasized that strikes aimed at profit distribution could constitute illegal industrial action.
"It is hard to find cases where overseas global companies have systems in place to pre-commit a fixed percentage of profits to workers," a KEF official said. "How corporate profits are utilized is not a matter to be decided through negotiations with unions but should be determined and operated based on management judgment." Some have pointed out that the performance pay conflict has grown as the implementation of the so-called Yellow Envelope Act (the revised Trade Union Act) has made even business management decisions subject to industrial disputes.
Regarding union demands to codify the operating profit distribution system in collective agreements, the KEF noted that "unlike existing performance pay systems, this is a demand for direct distribution of corporate profits." If performance pay is pre-allocated directly at the operating profit stage, a structure is created in which profits that should accrue to shareholders are allocated to executives and employees without shareholder consent. The dominant view in the business community is that while paying performance bonuses after the fact can be a normal management decision, pre-allocation of operating profit risks legal violations.
Earlier, the "Korea Shareholders' Movement Headquarters," a Samsung Electronics shareholder group, also argued that "pre-allocating a fixed percentage of pre-tax operating profit as a source of performance pay is a disguised illegal dividend that bypasses the dividend procedures stipulated under the Commercial Act," adding that "the outflow of company funds is a matter for shareholder meeting resolution and cannot be subject to autonomous labor-management bargaining." There have also been claims that directors who approved the tentative performance pay agreement violated the "duty of loyalty of directors" under the Commercial Act.
The KEF also made it clear that operating-profit-linked performance pay does not constitute wages. If such performance pay were to be classified as wages, controversy could spread again over whether it qualifies as ordinary wages, and night, holiday and overtime allowances as well as severance pay could surge in a chain reaction. For the business community, there is a strong need to reaffirm that performance pay is not compensation for labor and to preempt related concerns.
The KEF appealed that "corporate performance pay systems should be operated reasonably based on the sustainability of the company and the principle of merit-based pay." It explained that "performance pay should be determined by comprehensively considering medium- to long-term investment plans and corporate liquidity within a range that does not undermine the long-term competitiveness and investment capacity of the company," adding that "it should be used as a compensation tool to incentivize worker productivity improvement and corporate performance creation, not as mere profit distribution."
The federation added that "it is desirable to operate the performance pay system in a direction that aligns the interests of the company and workers in the medium to long term, such as through conditional stock compensation, rather than short-term cash-oriented compensation."
