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Labor Ministry Urges Companies to Base Wages on Performance, not Seniority
Rational Wage System
Labor Ministry Urges Companies to Base Wages on Performance, not Seniority
  • By matthew
  • April 1, 2014, 12:55
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The government is urging the private sector to simplify the wage system to focus on base salary and job performance/function rather than seniority. It also advised expanding the weight of bonuses linked to performance.

The Ministry of Employment Labor published “Rational Wage System Reform Manual” on March 20 and distributed it to municipalities and major business locations. It announced its intention to support management and labor to revamp the  arbitrary wage system based on the manual, adding that it will apply a specific model by industry and modify the manual gradually via consultation. A company’s wage system is basically determined through negotiations between labor and management. Nevertheless, the government’s guideline this time was ironed out because the conflict between labor and management has been growing, with the introduction of the retirement age extension and wage peak system, stemming from an aging society and continuing labor management disputes over what constitutes ordinary wages. 

First of all, the manual suggests simplifying the wage structure by focusing on base pay, merging regular extra pay and bonuses into one base pay rate. This is because the current wage system has a lot of room to create controversy due to its convoluted way to award extra pay.

It has also been pointed out that the current Korean wage system is predominantly based on seniority, where the wage is proportional to the number of years put in at work. This system should be restructured to a performance/function based system. According to the labor ministry, 71.9 percent of companies with a payroll of more than 100 adopt the seniority system, and bigger companies are more likely to employ the system. But under the current system, the wage gap between employees of different seniorities in Korea is higher than that of other countries. For example, a manufacturing wage earner with 30 years of seniority earns a wage that is 3.3 times larger than that of a novice, which contrasts with 2.4 times in Japan, 1.97 in Germany, and 1.34 in France, indicating that the gap in Korea is much higher than that of advanced countries.

A representative of the ministry explained, “The seniority system cannot work in an aging society with a retirement age of 60, and has bad side effects such as companies being reluctant to hire young employees or adopting an early retirement system in the form of voluntary retirement.”

In the meantime, labor and management are showing mixed responses to the new wage reform manual. One person from the Federation of Korean Industries says, “The wage system reform was sorely needed to cope with impending issues such as ordinary wages and work hour reduction, and the manual was timely.” 

However, it should be noted that the government’s guidelines are not legally binding. Fundamentally, the wage system is set through negotiations between labor and management in companies. “Wage system reform was an imminent task, and it is advised that labor and management refer to guidelines to voluntarily reorganize their own wage system,” said Park Wha-jin, general director of the labor-management cooperation bureau at the Labor and Employment Ministry. 

In contrast, the Korean Confederation of Trade Unions decried the manual saying, “The manual is full of bias, as it tries to secure the employer’s profits by cutting into senior employees’ wages. According to the government, first they should dock civil officers’ wages, because civil officers are guaranteed incrementing wages until their retirement age.” Another and more tougher Democratic Confederation of Trade Unions said, “In one word, the manual’s intention is to disseminate a low wage system and to cut senior employees’ wages more and more,” adding, “As older workers tend to predominate the labor market, the reform manual tries to intensify work competition and performance.” 

In response, Lee Jang-won, head of the wage-task center at Korean Labor Research, puts, “There is no reason to stubbornly oppose the reform, since its purpose is to ensure giving similar wages to workers at small and medium-sized companies and irregular workers, as long as they perform similar work.”