Recently, companies have been facing great difficulties in managing their workforces due to the rapidly changing labor environment in Korea from such factors as the extended statutory retirement age to 60 and the expansion of ordinary wage. Companies need to manage their workforces more efficiently with more flexibility. Given that Early Retirement Plans (ERPs) are based on voluntary decisions by employees, the ERP is an effective option for companies to minimize conflict and ensure workforce management efficiency. Hence, the KEF has developed a standard model for ERPs and formula to calculate early retirement benefits:
1. Basic principles
(1) Through ERPs, companies can improve workforce management efficiency and resolve congestion of personnel and hire more new employees. For employees, the ERP can be utilized as an opportunity to gain additional income and explore new career opportunities.
As the statutory retirement age has recently been extended to 60 and the scope of ordinary wage expanded in Korea, companies cannot help but reform their workforce strategies to cope with these significant changes. There are concerns that these stricter employment regulations will have a negative impact on job creation if company performance and earnings do not improve at the same time. Since the Korean labor market is quite inflexible in terms of workforce management except for voluntary resignation of workers, few options exist for employers to reconstruct their workforces outside of independent retirement systems, dismissals for managerial reasons and voluntary early retirement plans.
However, the retirement age extension has made it tougher for companies to independently operate their own retirement programs and a number of requirements for dismissing employees for managerial reasons, according to Korean labor law, are frequently behind labor conflicts. In this regards, ERP seems to be an option for companies.
Through the use of ERP, companies are able to reduce redundancy and improve efficiency, securing the ability to hire new employees and decrease congestion of personnel. Companies also can motivate their remaining employees and improve their competitiveness. From the employee’s perspective, the ERP offers financial stability with their severance pay, as they explore new careers in accordance with their life goals.
(1) Companies need a fair and reasonable model for the ERP, and respect voluntary decisions by employees
When designing an ERP, companies are advised to be specific in the details and procedures. They need to come up with measures and policies on ERP implementation after taking into consideration all potential impacts. The success of the ERP depends on how reasonably the following factors are designed; number of retirees, the scope of targeted employees and the level of compensation offered for early retirement. Without sufficient preparation, the ERP might result in negative impacts such as the loss of competent employees, excessive financial costs for early retirement, labor conflict and overall demotivation at the workplace.
[Table 1] Development of an Early Retirement Plan
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1. Determine implementation schedule, number of retirees, scope of targeted employees, level of compensation, etc.
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2. Consult with the trade union and interview the targeted employees |
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3. Notify workforce of ERP implementation and receive applications for the ERP |
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4. Deliberate on the ERP applications by the responsible department or HR committee |
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5. Decide on the final list of retirees |
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6. Reorganize and revitalize workforce after conclusion of the ERP |
If the ERP is fairly designed and carried out according to an acceptable procedure, it can be deemed as a type of compensation system. As the employer’s discretion over an ERP is well-recognized in the Korean labor law, companies are advised to take their financial capability into consideration first and develop the benefit level at the same time, to make the ERP more attractive for the target employees.
(3) Early retirement benefits need to be determined after comprehensively considering such factors as the business condition of the company and the remaining time for each employee until retirement age
Since the primary aim of the ERP is to bring stability to a company’s business, determining the appropriate level of compensation for early retirement is crucial. There is a wide gap between companies in terms of early retirement benefits, and these are usually decided during labor-management negotiations without generally-accepted norms or principles due to the absence of practical ERP models and a lack of information. Companies with strong trade unions especially need to be cautious when they determine their initial level of early retirement benefits as these benefits may be regarded as a minimum level of compensation, with some workers expecting to receive more.
(4) When introducing an ERP, companies need to assist retirees in finding new jobs
Companies are advised to provide vocational training, educational programs and outplacement services within their capacity to assist retirees in finding new jobs. This will make the ERP more attractive, increase voluntary acceptance, and improve corporate image, which may contribute to increasing social reputation.
The primary goal of the ERP is to reduce redundancy in the workforce and improve business conditions. However, rumors about poor job security can negatively impact the workplace. To prevent this and relieve employee anxiety, companies can assist them with outplacement service. Such services are an efficient way to decrease labor conflict and poor workplace morale which may be caused by introduction of ERP. Employers are also advised to offer continuous attention and support to retirees towards stability after retirement through retirees’ networking or reemployment support services. Such efforts will allow remaining employees and those on their way out to retain their pride and keep a positive image of the company.
1. Calculating Early Retirement Benefits
(1) Purpose
When calculating ERP benefits, various factors such as employee ages, length of service and remaining years until retirement age, should be taken into account. However, as there are no norms or generally-accepted principles, most companies determine their level of compensation through negotiation with their trade union. Hence, the KEF has developed an ERP guide that considers these factors in order to present a practical standard on employee compensation levels, and expected additional income for employees from the ERP.
(2) Principles designing standard model
The model will assist in calculating early retirement benefits that reflect the company’s business conditions, remaining years until retirement age, length of service, employee performance evaluations and other individual variables.
(Basic formula) First, determine the retiring employees’ Standard Monthly Income (SMI) based on their salary and company’s financial situation and then calculate the base benefit by considering the remaining years until retirement age.
(Adjustment) In cases where retiring employees have contributed to the company for a long period of time and showed a high level of performance, a higher coefficient can be applied at company discretion within the KEF guidelines.
(3) Factors to consider for calculation of early retirement benefits
① Standard Monthly Income (SMI) (reflecting business conditions)
– Determine the Standard Monthly Income (SMI) in reflection of company profitability and financial soundness.
– Use return on sales (ROS) for profitability, the debt-to-equity ratio (D/E) for financial soundness, and base pay for wages.
② Set the base benefit (reflecting remaining years until retirement age)
– Divide the remaining years until retirement age into certain sections to estimate the possibility of outplacement according to age group and maximum capacity for payment of benefits, etc. Then, calculate the base early retirement benefits by applying the formulas explained herein for each section.
ⓐ (Unit section) Establish three sections of the remaining service period by dividing the whole period into five years, considering the expectations for work until full retirement age and possibility of outplacement of the early retirees.
※ Age sections: 5 years or less, 6 to 10 years, 11 years or more
ⓑ (Coefficient) The coefficient increases as the remaining period decreases. Use a progressive system to minimize the gaps between coefficients by section.
※ The coefficient to reflect remaining service period is higher for workers near retirement age, as it is difficult for them to find employment realistically speaking, meaning such workers do not have much motivation to voluntarily retire.
③ Apply adjustment premium (reflecting working period and performance index)
– For those with long years of service and high performance, apply adjustment premiums in compensation for long service and high performance.
ⓐ (Years of service) Apply a higher coefficient for longer service, in recognition of the contribution to the company according to their years of service.
ⓑ (Performance) Use a higher coefficient for employees with better work performance.
(4) Process of calculating Early Retirement Benefits
[Table 2] KEF Model: Calculating Early Retirement Benefits
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1. Calculate SMI |
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2. Determine base benefit according to remaining period |
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3. Apply adjustment premium onto base benefit |
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4. Early Retirement Benefits |
Step 1. Calculate Standard Monthly Income (SMI)
(Basic formula) SMI = Base monthly wage × coefficient (A + B)
(Wage items) Use base wage as the basis for calculation of early retirement benefits
※ The proportion of base wage in total wage varies by company, but the KEF recommends using base wage as a basis.
(Adjustment rate) Set adjustment rates (minimum 35%, maximum 80%) by using ROS and D/E which represent profitability and financial soundness respectively.
※Use a 3- or 5-year moving average to reflect changes in business indices according to economic trends, rather than a 1 year index.
[Table 3] Determining Coefficients Using Return on Sales & Debt-to-Equity Ratio
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Return on Sales (ROS) |
Coefficient (A) | Debt-Equity Ratio (D/E) | Coefficient (B) |
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Less than 0% |
35% | Less than 50% | 20% |
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Less than 2% |
40% | ||
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Less than 100% |
15% |
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Less than 4% |
45% |
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Less than 200% |
10% |
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| Less than 6% |
50% |
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Less than 300% |
5% | ||
| Less than 8% |
55% |
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300% or more |
0% | ||
| 8% or more |
60% |
Note: Coefficients are used to adjust SMI according to business conditions
Step 2. Determine remaining service period and base benefit
(Basic formula) Base benefit = Standard Monthly Income × remaining months until retirement age
(Unit section) Set 3 sections such as 5 years or less, 6 to 10 years, and 11 years or more
(Adjustment) Apply a lower discount rate for a shorter remaining period until full retirement age in consideration of expectations for work and possibility of early retiree outplacement.
(Progressive system) Apply different coefficients by section, and design the system so it is progressive to minimize gaps generated from different coefficients.
(Benefit ceiling) Set 10 years as the maximum remaining period, which also applies to employees with more than 10 years before retirement age.
[Table 4] Calculating Base Benefit in Consideration of Remaining Work Years
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Remaining Years Before
Retirement Age
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Amount of Base Benefit
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5 years or less
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Standard Monthly Income× {(Remaining months)/4}
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6 to 10 years
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Standards Monthly Income×[15 months+ { (Remaining Months-60)/5 } ]
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11 years or more
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Standard Monthly Income ×27 months
※ For periods of 11 years or more, put 10 years in the calculation (Additional benefits are not paid for the remaining working years beyond 10)
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Step 3. Calculate adjustment premium to be added to base benefit
(Basic formula) Adjustment premium = Base benefit × adjustment coefficient (A +B)
(Calculation criteria) Apply a higher coefficient for longer service and higher performance evaluation
(Calculation) Add the number of years of service (A) and performance rate (B) derived from performance evaluation, with the sum of A and B multiplied by base wage
Companies are advised to determine their own sections for years of service (which may vary by company according to the purpose for the ERP), evaluation results and respective percentages for coefficients A and B. Since companies have different evaluation processes, each company should consider its own circumstances when setting coefficients.
[Table 5] Example of Coefficients according to Years of Service and Performance Evaluations
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Years of Service
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Performance Evaluations
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Section
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Coefficient (A)
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Section
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Coefficient (B)
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Longer than 20 years
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15%
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S
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15%
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16 to 20 years
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10%
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A
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10%
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11 to 15 years
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5%
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B
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5%
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10 years or fewer
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0%
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C
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0%
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Step 4. Calculating final benefit
Define the final benefit by adding the base benefit from Step 2 and the adjustment premium from Step 3.
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Early Retirement Benefit = Base Benefit + Adjustment Premium
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