The Korea Employers Federation recommends adjusting wages within the range of 2.3% for this year. This percentage includes any wage increases from the change of ordinary wage scope, retirement age of 60 and working hour reduction.
Korean companies these days face an uncertain future. With Quantitative Easing tapering off in America, instability in developing economies and recessions in advanced nations, weakening yen and stagnant domestic demand, the ability of Korean companies to envision the future is extremely limited. The culture of corporate bashing which has spread throughout the society, along with a profusion of anti-market legislation are increasing the difficulties of companies who are the engines of the economic growth and job creation.
In the midst of this uncertainty, labor is expected to demand large wage increases. However, wage increases which exceed labor productivity will likely shrink investment, job creation and national competitiveness.
In particular, issues such as expansion of the scope of ordinary wage, a mandatory retirement age of 60 and reduction of working hours will bring about significant changes to the labor market environment. These issues will likely create even more confusion and increase the burden on businesses. In this regard, wage stabilization must be a priority if company competitiveness and employment security are desired.
Considering both the internal and external situation, the KEF would like to make the following recommendation for wage adjustments in 2014.
First, wages for this year should be adjusted up in the range of 2.3%. However, for companies which have already made increases of more than 2.3% due to changes in the scope of ordinary wage, extension of the retirement age, reduction of working hours etc., the KEF recommends a wage freeze.
The principle of the wage adjustment this year is to modify wage within 2.3% scope, considering national productivity. This recommended optimal rate for wage adjustment this year reflects the total increase in direct labor costs of companies, including other increases resulting from changes in the law, such as ordinary wage, extension of the retirement age, reduction of working hours and etc. The actual rate should be determined by taking into consideration both types of increase. However, for companies which have already provided increases in excess of 2.3% due to the changes in the law, the KEF recommends a wage freeze.
Second, organize payroll items in accordance with the Supreme Court decision on ordinary wage.
Instituting an effective wage system through the introduction of job and performance-based wage systems is the most desirable method. However, companies should thoroughly analyze and restructure their payroll items based on the Supreme Court decision on ordinary wage if introducing job and performance-based wage systems is not feasible. In particular, items which are not in the category of ordinary wage but stipulated as ordinary wage under current collective agreements should be modified based on the Supreme Court’s standards for determination.
Third, minimize the damage to company’s competitiveness and ability to hire by introducing a wage peak system in preparation for the extension of retirement age to 60.
Considering the realities of the Korea’s labor market where seniority-based wage schemes are dominant, a compulsory retirement age of 60 is likely to create enormous costs, congestion in HR management and damage to the company’s ability to hire. In order to minimize these effects, companies should switch their current wage schemes to a more efficient system based on performance and job. However, switching the wage scheme before enforcement of the compulsory retirement age is extremely difficult. Because of this, a wage peak system should be introduced. The KEF is planning to develop and distribute its own model to provide practical support for companies wishing to introduce a wage peak system, and hopes that companies will find this model very useful.
Fourth, develop ways to modify the wage scheme from seniority-based to job and performance-based systems. Gradually abolish the automatic salary rise system under the seniority-based wage scheme if switching to job and performance- based schemes is not feasible.
The biggest issues in the current labor market, revolving around the mandatory retirement age of 60, reduction of working hours and the expanding scope of ordinary wage, stem from the seniority-based wage scheme which increases wages based on age and the number of service years, with no relationship to performance or job. With the rapid changes in the labor market, the seniority-based wage scheme is burdensome to companies. Therefore, the KEF recommends that companies decrease the number of items reflecting seniority in their wage scheme and restructure the wage system so it can properly reflect the value of the job and fairly compensate workers based on their performance. If switching to a job and performance- based scheme is not feasible, abolishing the automatic pay rise is still desirable for minimizing the damage.
Fifth, seek rationality, transparency and fairness in evaluating employees for the successful transition to job and performance-based wage scheme.
Companies should seek transparency and fairness in their evaluation systems for the purpose of smooth transition to job and performance-based wage scheme. For the success of the transition, it is necessary to reasonably design the evaluation for individual and team performances and operate them in a transparent and fair manner. Workers’ acceptance of the results should continuously increase through frequent feedback about performance, coupled with a clear evaluation process.