Productivity must come first

Lee Ji-man

Last year, the Supreme Court ruled that regular bonuses and allowances should be counted as base salary. The National Assembly passed a revised bill pushing back the legal retirement age to 60. These two changes have major ramifications on the corporate sector and the current pay system. The extension in the retirement age and scale of base salaries would sharply increase labor costs for companies and hurt the overall job market. Companies inevitably would have to work harder to raise productivity and overhaul the current seniority-based pay scale in order to lessen the extra labor costs.

South Korean employees are paid a base salary and awarded the same increases in pay at regularly scheduled intervals. Those who work the longest earn the highest annual salaries. An employee who worked for 30 years in a manufacturing job receives a paycheck that is more than triple of what a novice gets. Without modifying this outdated system, the economy and corporate sector cannot grow and advance in competitiveness.

The revised employment act also demands companies to restructure their pay systems while adopting a new retirement age. The new Employment Ministry guideline is part of efforts to accelerate a transition to a new system. The guideline recommends companies revise their pay system to reward employees according to performance and work characteristics instead of period of service.

Management and labor differ greatly in how they have responded to these changes. Management favors the changes to Korea’s salary system because they encourage employees who otherwise cannot enjoy the benefits of working fully until retirement, ease complaints and conflicts among different age groups in companies, help reserve spots for young people regardless of retirement age and ensure job security and corporate sustainability.

The labor sector, however, protests that the revised pay system would only give an excuse for employers to cut wages. With a performance-rating system, senior employees may not receive as much pay as before, although they would be compensated by being kept longer on the payroll with the extension of the retirement age. Japanese companies, from which Korea has imitated management beliefs, have already eliminated the seniority-based wage scale. Electronics and technology companies like Mitsubishi, Fujitsu and NEC have enhanced their competitiveness by improving productivity and encouraging employees through performance-based compensation. Employees performed more enthusiastically and loyally to their companies when they were rewarded for their output.

Retirement and pay structure have become social issues only in South Korea and Japan. Seniority-based pay scales are rare in Western countries, where employees have long been paid according to their performance. But Japan restructured its wage system to reflect productivity and performance rather than seniority before it extended the retirement age to 60 in 1990. As result Japan Inc. has become leaner and more competitive over the last two decades. Japanese employees since 2006 can work till age 65 and earn more in their lifetimes because of the overall extension in working years. Even labor union leaders are opposed to returning to the old seniority wage system. Workers also agreed in a poll that seniority-based pay should be eliminated for good.

Payment systems should not benefit either management or labor. It must work both for the management for sustainable growth for the company and for employees for job security and fair wages. It must be win-win for both management and labor.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, March 29, Page 28

*The author is a professor of business management at Yonsei University.

By Lee Ji-man