South Korea's business community issued a special advisory stating that institutionalizing performance-based bonuses is not a subject for collective bargaining, as union demands for "N% of operating profit" as performance pay continue to spread. Employers expressed concern that pre-committing to distribute a fixed percentage of corporate profits to workers is rarely seen even among global companies.
The Korea Enterprises Federation (KEF) said Wednesday it had distributed a "Special Advisory from the Business Community on Union Demands for Corporate Profit Distribution" to its member companies.
"Recently, some large corporate unions have been demanding that systems distributing a certain percentage of operating profit to union members be codified through collective agreements," KEF said. "These demands are entirely different in nature from existing performance pay systems and amount to demanding direct distribution of corporate profits." KEF added, "Corporate profits are management resources that must be utilized for investment, employment, research and development, and improving financial structure to secure the company's sustainability and future competitiveness. Union demands for the pre-emptive distribution of corporate profits raise concerns that they could result in restricting shareholder rights."
KEF particularly emphasized, "It is difficult to find cases even among global overseas companies where systems are in place that pre-commit to distributing a certain percentage of profits to workers. How corporate profits are utilized is not a matter to be decided through negotiations with unions but should be determined and managed according to management judgment."
Accordingly, KEF advised companies that "it must be clearly stated that monies distributing management performance such as operating profit do not constitute wages." If performance pay is classified as wages, controversy arises over whether it also qualifies as ordinary wages, potentially triggering a chain reaction of sharp increases in night, holiday, and overtime allowances as well as severance payments. The Supreme Court has consistently ruled that profit-sharing distributions, whose payment or level varies depending on management performance and other factors, do not fall within the category of wages, considering that they are not closely related to the provision of labor and that other factors difficult for workers to control have greater influence.
KEF also stated that "it must be made clear that institutionalizing standards for corporate profit distribution falls within the company's inherent management judgment and cannot be a subject of collective bargaining." Since mandatory collective bargaining subjects under the Trade Union Act are limited to "working conditions such as wages, working hours, welfare, dismissal, workers' status, and other treatment," corporate profit distribution is neither wages nor can it be considered welfare or other treatment. "Companies have no legal obligation to comply with union demands for corporate profit distribution, and it must be made known that strikes or other industrial actions waged by unions with the primary purpose of corporate profit distribution can constitute industrial actions that are illegal in purpose," KEF stressed.
KEF urged that "corporate performance pay systems should be operated reasonably based on the principles of corporate sustainability and merit-based pay." The federation explained, "Performance pay should be operated within a scope that does not undermine the company's long-term competitiveness and investment capacity, and should be determined by comprehensively considering medium- to long-term investment plans, profits, and corporate liquidity. Performance pay should be utilized not as simple profit distribution but as a compensation tool to incentivize improvements in worker productivity and the creation of corporate performance." It added, "It is desirable to operate performance pay systems in a direction that aligns the interests of both the company and workers over the medium to long term, such as through conditional stock-based compensation, rather than short-term cash-based rewards."
