The wage peak system refers to the gradual reduction of wages for senior workers in return for continuing employment after they reach a certain age. While there has as yet been no clear academic definition of the wage peak system, it is generally considered to be a tool to lower the wages of senior workers in alignment with their reduced level of productivity, while at the same time providing them with job security.
In particular, as the wage systems of most Korean companies are currently based on seniority and a set wage level according to the worker’s age or years of service, the wage peak system is accepted as one solution for corporate in Korea to relieve the increasing financial burden created by extension of the retirement age to 60, coupled with a rigid wage system. Given that the seniority-based wage system allows older employees to receive a higher salary and additional fringe benefits, it is a fact that extension of the mandatory retirement age to 60 would put an excessive financial burden on companies in the immediate future, so that they cannot help but adopt the wage peak system in order to survive. Under these circumstances, the Korean Employers Federation has developed a new model of wage peak system, the ‘KEF Wage Peak System Model,’ to provide companies with guidelines.
1. Cases of Korean Companies
As of 2012, the implementation rate of the wage peak system stood at 16.3% in Korea. This means that, among workplaces with 100 or more employees, over 1,600 companies had adopted the wage peak system, an increase from 2.3% in 2005.
[Figure 1] Implementation Rate of the Wage Peak System in Korea
* Note: Data is from a survey of workplaces with 100 or more employees
* Source: Ministry of Employment & Labor
2. Process of the KEF Wage Peak Model
[Figure 2] Wage-Age Curve and Model Process
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STEP 1. Calculate the additional direct labor cost of employees with the extended retirement age
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First, companies need to calculate the additional direct labor cost due to the extended retirement age, and the ratio of it to the total direct labor cost, in a situation where the wage peak system is not implemented.
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When ‘n’ means the current retirement age, and ‘w’ means the average wage of employees aged ‘n’,
The amount of additional financial burden due to the extended retirement age = [the number of employees aged ‘n’ + the number of employees aged ‘n-1’ + … the number of employees aged ‘2n – 59’] × w
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For example, if a company extends its retirement age from 57 to 60 without adopting the wage peak system, and wages for the period of extended employment are assumed to be the same as always:
Amount of additional labor costs per year =
(Total number of employees aged 55~57) × the average wage of employees aged 57.
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STEP 2. Determine the level of financial burden that the company can bear
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Considering that each company will have variations in such areas as net profit margin and debt ratio, the KEF suggests the proportions of financial burden that a company might have to shoulder from the additional labor costs resulting from the extended retirement age.
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Taking into account differences in level of profitability and stability, each company needs to determine its burden rate when the retirement age is extended. (The burden rate is the proportion of the company’s financial burden from the total additional labor cost if the wage peak system is not adopted).
– Profitability: Management index showing business performance (related to net profit margin, etc.)
– Stability: Management index showing responding ability to changing economic conditions (related to debt ratio, etc.)
In order to reflect changes in management indices in conjunction with the economic situation, a company needs to use the average of each index for 3 to 5 years, not just one year.
After a company determines its basic burden rate (A) based on net profit margin, it decides additional rates (B) based on debt ratio. Then, to determine the proportion of labor cost that the company would bear, (A) and (B) are added together.
| Net Profit Margin | Basic Burden Rate (A) | Debt Ratio | Premium Rate (B) |
| Under 0% | 30% | under 100% | 25% |
| Under 2% | 35% | ||
| under 200% | 20% | ||
| Under 4% | 40% | ||
| Under 6% | 45% | under 300% | 15% |
| Under 8% | 50% | ||
| 300% or more | 10% | ||
| 8% or more | 55% |
2. Variation in burden rate (autonomously set within the KEF model)
In order to reflect other factors which have not been included in the KEF model, companies are advised to adjust their burden rate as follows:
(1) Addition
① For industries where productivity decrease is small compared to the age increase such as the manufacturing sector, or in companies where it is difficult to replace employees, the basic burden rate can increase by up to 10%. This rate is applied to a specific group, not to an individual employee, and is also unsuitable for companies with more than a 70% burden rate.
② When a company has already set a very low wage level for older employees due to managerial difficulties, a premium of up to 10% could be added to ensure economic stability for the employees.
(2) Subtraction
① Only companies which currently set their retirement age at or under the age of 56 can lower their burden rate by up to 10%. As the period of extended employment in those companies is longer than others with a retirement age of 57 or older, their financial burden is inevitably increased despite a similar burden rate.
In this situation, the company burden from the total increase in direct labor costs due to the retirement age extension is set as follows:
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Company burden rate = b (net profit margin reflected) + additional rate (debt ratio reflected) ± adjustment
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Ex. 1) In case of a company with 3.5% net profit rate and 250% debt ratio company burden rate is 55% (40% basic burden rate + 15% additional rate). 10% is added for production workers in the company, so the rate for production workers is 65% while it is 55% for nonproduction workers.
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Ex. 2) For a company with net profit rate of 8% and debt ratio of 150%, the burden is 75% (55% basic burden rate + 20% additional rate). If the company’s retirement age is 55 years of age, 10% is subtracted. Finally, the company burden rate is 65%.
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STEP 3: Set payment rate
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Solvency margin is determined based on the company burden rate and the beginning age for wage adjustment.
Once the company burden rate is determined, the lower the average beginning age for wage adjustment, proportion of elderly workers and the amount of their wages, the higher the wage payment under the extended retirement age.
Therefore, the KEF recommends adjusting wages before the existing retirement age.
※ The wage for workers with extended retirement age is equal to the sum of the amount of company burden plus the wage adjusted before the existing retirement age.
Companies may set their own rate of payment by age group within the total solvency margin.
The average wage under the extended retirement (D)
= [amount of company burden + wage reduced before the retirement age (wage increase not counted)] / (number of workers with extended retirement age)
■ How to Set Payment Rate
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This model displays the amount that a company has to pay during the period of extended retirement age. Companies may set the rate by age on their own. The following is the KEF suggestion.
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< Uniform Wage Setting >
Place the company burden determined in Step 2 at the median of extended retirement age. Then set the payment rate for each age by gradually adding or deducting 5% or 10% from the median age.
It is particularly advisable for companies to adjust wages before the existing retirement age and set a higher rate of payment during the extended years until retirement.
※ In the KEF model, company burden is determined before a worker’s retirement age. The model sets a higher rate of payment by recommending that a company adjust wages before the existing retirement age, and place the adjusted amount in the company burden. This is the amount to be paid during the extended employment years.
Case 1 illustrates the rates of payment if wages are adjusted 2 years before the existing retirement age, and Case 2 shows the rates if wages are adjusted only for the extended years until the new retirement age. Both cases are for large enterprises, assuming they introduced a wage-peak system with a 60% company burden rate.
* Even with the same company burden rate, Case 1 sets a higher rate of payment after retirement age (same for SMEs) than Case 2. → Case 1 is recommended.
Company burden rate, deduction rate, etc., vary by circumstances in individual companies.
3. KEF Wage Peak Model (e.g. 60% company burden)
(1) Large enterprises (retirement age at 60 to be enforced in 2016)
[Case 1] Payment rate by age if wages are adjusted 2 years before (2015) the extended working years under the retirement age extension
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Existing Retirement
Age
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Prior to the Existing Retirement Age
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Extended Working Years under Retirement Age Extension
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2015
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2016
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2017
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2018
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2019
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2020
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2021
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Age 55
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85%
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85%
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75%
(age 56)
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70%
(age 57)
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65%
(age 58)
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60%
(age 59)
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60%
(age 60)
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Age 56
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85%
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85%
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75%
(age 57)
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70%
(age 58)
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65%
(age 59)
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60%
(age 60)
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Age 57
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85%
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85%
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80%
(age 58)
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70%
(age 59)
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60%
(age 60)
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Age 58
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85%
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85%
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80%
(age 59)
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70%
(age 60)
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Note: payment rate in case a company deducts 15% wages during 2 years prior to the existing retirement age.
[Case 2] Payment rate by age if wages are adjusted only for the extended working years under the retirement age extension
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Existing Retirement
Age
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Prior to the Existing Retirement Age
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Extended Working Years under Retirement Age Extension
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2016
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2017
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2018
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2019
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2020
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2021
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Age 55
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100%
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70%
(age 56)
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65%
(age 57)
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60%
(age 58)
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55%
(age 59)
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50%
(age 60)
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Age 56
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100%
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70%
(age 57)
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65%
(age 58)
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55%
(age 59)
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50%
(age 60)
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Age 57
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100%
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70%
(age 58)
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60%
(age 59)
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50%
(age 60)
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Age 58
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100%
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65%
(age 59)
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55%
(age 60)
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[Case 1] Payment rate by age if wages are adjusted 2 years before (2016) the extended working years under the retirement age extension
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Existing Retirement
Age
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Prior to the Existing Retirement Age
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Extended Working Hours under Retirement Age Extension
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2016
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2017
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2018
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2019
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2020
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2021
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2022
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Age 55
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85%
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85%
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75%
(Age 56)
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70%
(Age 57)
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65%
(Age 58)
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60%
(Age 59)
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60%
(Age 60)
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Age 56
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85%
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85%
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75%
(Age 57)
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70%
(Age 58)
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65%
(Age 59)
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60%
(Age 60)
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Age 57
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85%
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85%
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80%
(Age 58)
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70%
(Age 59)
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60%
(Age 60)
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Age 58
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85%
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85%
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80%
(Age 59)
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70%
(Age 60)
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Note: Above rates of payment are for a company which has deducted 15% of wages during the 2 years prior to the existing retirement age.
[Case 2] Payment rate by age if wages are adjusted only for the extended working years under the retirement age extension
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Existing Retirement
Age
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Prior to the Existing Retirement Age
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Extended Working Hours under Retirement Age Extension
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2017
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2018
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2019
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2020
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2021
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2022
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Age 55
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100%
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70%
(Age 56)
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65%
(Age 57)
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60%
(Age 58)
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55%
(Age 59)
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50%
(Age 60)
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Age 56
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100%
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70%
(Age 57)
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65%
(Age 58)
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55%
(Age 59)
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50%
(Age 60)
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Age 57
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100%
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70%
(Age 58)
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60%
(Age 59)
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50%
(Age 60)
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Age 58
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100%
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65%
(Age 59)
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55%
(Age 60)
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