Rethinking base salary

The Seoul Central District Court on Thursday delivered a partial victory for the union of Kia Motors in its lawsuit against the management by counting regular bonuses and other incentives as base salary. The court ordered the management to issue 422.3 billion won ($376.1 million) in unpaid wages from Aug. 2008 to Oct. 2011 by recognizing bonuses and meal allowances as a part of fixed payroll. The court rejected the management’s argument of “principle of good faith,” or an agreement between the management and union given business conditions, as the bench pointed to the carmaker’s profits during the cited period.

The court’s finding has rattled the business community. Since 2013, 192 companies have been in base salary disputes, and 115 cases are pending in court. About half of them are mid- or small-sized enterprises employing 300 or fewer people. Under the ruling, companies may also have to pay up to three years of compensation. With bonuses counted as base salary, allowances for overtime and non-work days also could be challenged. The spike in labor costs could further pain companies.

Kia Motors on Thursday warned the stock market that it could fall into the red in the third quarter as it would have to set aside around 1 trillion won in loss reserves for past payment dues following the court ruling. The company has been struggling because sales in China have more than halved from a year ago amid a diplomatic row over the deployment of a U.S. missile shield.

The ruling is also a wake-up call for the country’s outdated pay system. In the industrialization days of 1970s and 1980s, Korean employers tried to save regular pay as much as possible by compensating employees with various allowances instead. It was all well for the management that wished to keep regular pay to the minimum and the union that was more concerned with mechanical increases in annual pay. Such pay system does not work in today’s highly sophisticated industrial field. Jobs have become complicated and diverse. Productivity and seniority no longer necessarily match.

At the end of the day, all the confusion and cost over the dispute in base salary is dumped on the employers. The government and court must be more precise in their definition of base salary, and the legislature should hurry in necessary legislations. The union also needs to change its attitude and work with the management to devise a pay system that is more future-looking and workable for both sides.

JoongAng Ilbo, Sept. 1, Page 30