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Positive Implications of Wage Peak System in Korea
LG Case
Positive Implications of Wage Peak System in Korea
  • By Jung Min-hee
  • October 15, 2015, 06:30
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Despite the political stigma and negative connotations associated with the wage peak system in Korea, some major Korean companies report positive effects from adopting the system.

The wage peak system proposes reduced salaries for workers nearing retirement age (i.e., retirement age minus 5-7 years), as wages tend to increase steadily over a worker's lifetime. The premise is that the system would free up wage-money, which then could be used to hire younger workers. Proponents also argue that system would increase job security for older workers. Nevertheless, there are also opponents, mainly unions, that argue that the system is just a pretense to decrease real wages – they argue that the wage-savings will be retained by employers as excess profits.

Due to political sensitivity and stigma, large corporations in Korea have been passive about adopting the wage peak system. According to the Ministry of Employment and Labor, only 56 percent of affiliates of the top 30 companies have adopted the wage peak system as of the end of Aug. this year. Even when they decided to implement the system, this may end up as mere planning rather than reality on the ground.

In the early 2000s, when the issue started surfacing, facing strong resistance from the labor unions that refused to accept reduced salaries in exchange for an extended period of employment, management couldn’t easily broach the topic. Moreover, the management side also thought there is little benefit to be derived from reduced wages in return for an extended retirement age.

In the last couple of years, consensus has shifted towards adopting a wage peak system, as the majority of large corporations have come under increasing financial burdens with many employees pushing their 50s.

Despite worries about the negative reactions from workers, some large companies reported a positive side to adopting the wage peak system. LG is one of the large corporations in Korea that has adopted the wage peak system early on. Most LG affiliates, including LG Electronics and LG Care, have adopted the wage peak system.

In case of LG Electronics, due to the increasing number of workers in their 50s and 60s, the burdens from the rising personnel expenses have been bringing down the management. Also, at the same time, the management wants to keep experienced and highly-skilled personnel in R&D. Given conflicting interests and concerns, the wage peak system provides a good opportunity to find a middle ground between job security and reduced salaries. After the adoption of the wage peak system, LG saw the average period of employment period extend from 8.3 years in 2008 to 9.9 last year.