Last January, the Ministry of Strategy & Finance announced a broadening of its plans to enhance implementation of performance-based wage systems, which from 2010 had been applicable only to senior managers.
With this announcement, controversy over these wage systems increased, with labor beginning to take action against them. The KEF would thus like to offer advice for organizations introducing performance-based wage systems.
1. Form consensus on a performance-based wage system
Introducing a performance-based wage system aims at cultivating a performance-based organizational culture. Therefore, labor and management need to avoid conflict when possible by having sufficient discussion about the purpose and operation of the new system. The principle of improving productivity and public benefit by enhancing fairness in wage systems and expanding a performance-based organizational culture should be the principle.
In particular, full explanations should be given that performance-based wage systems are different from the government’s ‘Guidelines on Fair Personnel Management’ in terms of purpose, characteristics, and evaluation process, etc.
- Performance-based wage system: Paying fair wages according to performance
- Guidelines on Fair Personnel Management: Helping underperformers improve
2. Follow the procedures for amending the rules of employment when introducing a performance-based wage system, but consider ‘reasonable according to social norms’ should trade unions oppose the system
In principle, changing a seniority-based wage system to a performance-based one in accordance with managerial needs, such as improving productivity, does not constitute an unfavorable change. Nevertheless, such a change can be considered unfavorable even though it may be favorable for some, if the performance-based wage system leads to a reduction of some workers’ wages or the possibility of wage reductions.
For unfavorable changes, employers must receive consent from their workers. However, introducing the system in consideration of ‘reasonable according to social norms,’ as stated in juridical precedent, is advised over failing to introduce the performance-based wage system.
Some lower courts have made statements similar to the following, and employers would be prudent to refer to them when introducing their performance-based wage system.
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■ When a new wage system guarantees a fair opportunity to workers without discrimination, along with a fair and reasonable assessment procedure which guarantees a fair opportunity of higher wages to any worker who achieves certain outcomes, then the system is recognized as reasonable according to social norms. (Eastern Branch of Busan District Court 2013GaDan21019). |
Thus, employers are advised to work on the introduction with ‘reasonable according to social norms’ in mind, such as by explaining the reasons for introducing the new system and making efforts to consult with their trade unions if those representing a majority of the employees, or if the majority of employees are against the system.
3. Consider trade union’s abusive use of right to consent if trade unions refuse to agree to amend the rules of employment or delay the agreement procedures
For workplaces with trade unions, the institutional framework for a performance-based wage system is complete only when the collective agreement has been amended.
Employers should not accept demands from trade unions to put a clause in the agreement such as ‘Consent from the trade union shall precede any adjustments to the wage system,’ which can be used to hinder the introduction of a performance-based wage system. Adjusting wage systems is a management right of employers, and any clause in the agreement requiring prior consent is unreasonable as it hinders prompt decisions. It is therefore unnecessary for a collective agreement to have such a clause.
However, trade unions may use such a clause in the collective agreement to strengthen their opposition to a performance-based wage system. In this case, employers can go ahead with introducing the system, considering the possibility that courts may recognize the trade union’s opposition as an ‘abuse of right to consent’.
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■ Although the employer made sincere efforts to conclude an agreement with the trade union, the trade union was opposed without grounds or reason. Therefore the trade union abused its right to consent. (Supreme Court 2005Du8788) |
4. Preparation is necessary for legal conflicts such as complaint or lawsuits
If a person violates the procedures to amend the rules of employment, that person will be punished by a fine not exceeding KRW five million (Article 114 of the Labor Standards Act). If an agent, employee or any other worker of a business owner violates Article 114 of the Labor Standards Act, not only shall the offender be punished, but the business owner shall also be punished (Article 115 of the Labor Standards Act).
Nonetheless, it is not clear at this moment whether claims of violation are forwarded to the public prosecutor’s office or not, (originally under jurisdiction of the Regional Employment & Labor Administration) since the Minister of Employment & Labor considers introduction of such systems reasonable according to social norms and requiring no agreement between labor and management.
It is still possible that trade unions may sue in the courts to nullify any adjustment of the rules of employment, instead of lawsuits or reporting to the Regional Employment & Labor Office. Employers should note that if the courts rule the amendment a violation of the procedures, then introduction of the system will be nullified. However, employers are not punished in this case.
5. Adjusting base pay or creating new payment items not recommended
After introducing the new wage system, trade unions may demand that income levels be protected so that the existing wages under the old system remain the same. However, employers should not accept this. In specific terms, trade unions could ask for payments which vary by worker and are not specified (such as overtime pay, compensation for unused paid leave days, etc.) to become fixed payments.
Even if a worker receives the lowest possible score on a performance evaluation under the new wage system, raising base pay can lead to a higher income than under the old system. Although raising the base pay is needed, the total cost of wages under the new system should be the same as under the old system.
6. Promote fairness in evaluation by establishing a systematic index
Reasonable evaluation indices are needed that consider management goals, as are fair evaluation criteria and a fair evaluation system.
When preparing these indices, employers are advised to ensure fairness by encouraging workers to participate, such as giving them a chance to state their opinions, etc. Indices need to be measurable and transparent to ensure objectivity and acceptance.
Employers can consider inviting external specialists and aim at greater fairness when establishing the evaluation group. Also, having an assessment appeal procedure in place may help gain recognition that the workplace uses a fair assessment system.