Ahead of the mandatory retirement age law at 60 that will go into effect next year, seven out of ten companies in South Korea want to implement a salary peak system.
According to a survey conducted by the Korea Chamber of Commerce and Industry (KCCI) on “Challenges and Solutions to Companies on Implementing Mandatory Retirement Law,” 72.6 percent said that a salary peak system needs to be implemented to cut labor costs. Another 67.3 percent said that if a salary peak system starts without modifying the current wage structure, the burden from labor costs will increase. The mandatory retirement law at age 60 passed the National Assembly last year and will be implemented on Jan. 1, 2016 for companies with 300 or more employees. And from Jan 1, 2017, this law will be extended to companies with less than 300 employees as well.
A KCCI representative said, “Many South Korean companies are still following a seniority-based wage system. Consequently, extending the retirement age without reforming the current wage system will only add labor costs,” adding, “Before implementing this mandatory retirement law, the current wage system needs to be overhauled.”
According to statistics from the Ministry of Employment and Labor, 71.9 percent of companies with 100 or more employees as of 2013 are maintaining grade pay, a type of seniority-based wage, and only 16.3 percent of companies with 100 or more employees as of 2012 implemented a salary peak system.
A KCCI representative said, “Under the seniority-based wage system, employees over the age of 50 are susceptible to losing jobs or being encouraged to take honorable retirement because of the general perception that productivity falls short of wages with age.” It went on, “A wage system that can optimize one’s productivity to wage and job position would be ideal, but for now, a salary peak system has to be implemented to help middle-aged employees to stay in jobs.”
Most companies prefer a salary peak system, but there seems to be a long way to go in reforming the system under the current law. The Labor Standards Act restricts making changes of employment rules that would be disadvantageous to employees, which means the majority of employees have to agree on implementing a salary peak system. However, 43.2 percent of companies said the employees and labor unions would “oppose” a salary peak system, a downright conflict of interest between the companies and employees.
Implementing a mandatory retirement law at age 60 without adjusting the wage system is highly likely to reduce employing young workers. 56.5 percent said that new employment will decrease with implementing this law. To balance jobs for both young and middle-age employees, companies suggested, “creating matching jobs for older employees” (28.4 percent), “changing the wage system by adding a service allowance and bonus” (25.7 percent), “developing productivity and job skills of older employees” (25.4 percent), and “implementing salary peak system” (20.5 percent) as solutions.
Jeon Su-bong, the director of the research headquarters of KCCI, said, “Now that society is aging due to a low birth rate and long life expectancy rate, extending the retirement age is necessary. But by implementing the mandatory retirement law without modifying the wage system, companies have to take the burden of increased labor costs.” He added, “To make this mandatory retirement law effective and stabilize jobs for middle aged employees, the labor union and the company have to work together closely in negotiation of the wage system.”