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Multinational Corporate Compensation
by Tom Coyner
Korea Times
May 18, 2007
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As we all know, a good compensation program anywhere is to attract, reward
and retain good employees. Executives crafting compensation programs within
foreign companies in Korea, however, need to consider a great deal more than
their peers in their home countries.
First, Korean traditional payment schemes, while fading, still have a strong
influence on employee expectations. Second, even if Korean employees are
attracted to foreign company employment to pursue more individualistic
career goals, they remain very much part of Korean society that influences
their overall expectations. Third, foreign employers recognize that often
they are not the first choice, as they may have been in the past, and
accordingly need to offer attractive compensation packages while striving to
be reasonably profitable in Korea.
Recently Hewitt Associates shared some of their recent Korea compensation
findings at the British Chamber of Commerce’s Business Breakfast. Most of
the companies surveyed were multinational corporations (MNCs).
During the past five years, wage increases across the board among expatriate
firms have been hovering in roughly the 7 percent range while the GDP has
averaged out to about 4 percent. While wage increases are expected to drop
closer to the GDP and CPI averages, even this year, the anticipated wage
increases could be on average as much as 7.4 percent
Part of this gap between GDP and CPI with substantially higher wage
increases was blamed on management anxieties regarding labor unions. Though
organized labor’s enrollment rate is dropping close to the 11 percent mark,
the disputes, though less in number, have become more disruptive with more
days lost.
Hewitt Associates noticed that as much as Korea’s MNCs would like to
institute broad salary grades, about only 20 percent are able to do so.
About a quarter have adopted seniority-based systems, possibly because of
the acquisition of Korean companies. But more indicative for most small- to
medium-sized operations here, 37.5 percent have pegged their compensation on
individual job market points in order to recruit and retain hard-to-hire
specialists.
One of the more interesting philosophical issues for MNCs here is how to
deal with bonuses. Bonuses were a genuine necessity, say some 40 years ago,
when employees were paid minimal wages. There was paternal responsibility of
employers to provide extra cash so their employees could have enough for
special occasions, including New Year’s and Chuseok (Thanksgiving),
etc. This practice became so ingrained that most Korean employees expect
substantial semi-annual bonuses, regardless of their base pay and even their
personal performance.
Some years ago, a couple of MNCs attempted to roll in these guaranteed
bonuses into the regular salary and only pay out bonuses based on group or
individual performance. What they discovered, however, even with the larger
salaries, the employees found themselves in financial difficulties around
the major holidays without the bonuses as this benefit had become a kind of
forced holidays savings plan. In the end, the MNCs ended up reverting back
to the semi-annual bonuses -- but now at higher base salary levels.
Nonetheless, many MNC executives understandably feel uncomfortable with the
“we give you a bonus even if you do nothing” implied message associated with
the semi-annual bonuses _ even if one thinks of the bonuses simply being
deferred compensation plans. And that leads us to the frustrations in trying
to implement effective variable payment plans.
Communication is always near the top of any management issue, but it comes
right out as the second biggest cause of difficulty in implementing variable
pay schemes. Executives and their HR managers face at times a daunting task
of communicating through long-held pay perceptions when explaining what new
compensation plans offer. And not surprisingly, the largest challenge is
that at least a fifth of the employees don’t trust the performance appraisal
system or other matrix on which the pay variances are based.
One of the more unique aspects of Korean compensation surveys is that many
employers ask for data on compensation by title. To many Westerners familiar
with Korea, this may seem to be counter intuitive. After all, a gwajang
or supervisor in a large company may have the same level of
responsibility as a bujang or general manager in a much smaller
company. Nonetheless, the demand was large enough to force Hewitt Associates
to comply with client demand.
Hewitt found a very strong correlation with position title and overall
compensation. Only when one compares senior management and above does the
payment disparity between smaller and larger companies become pronounced.
Consequently, it is no feigned interest that Koreans display when they
closely examine each other’s business cards since they are sincerely
interested how well others are doing in this fiercely competitive society.
In some ways, this tie-out between title and compensation is a throwback to
the seniority-based, traditional compensation systems that still are hanging
on in many Korean companies. In fact, even if an employee does not deserve a
substantial salary increase, he or she may be promoted in position title,
based on the number of years in position _ although not necessarily with the
full salary increase as given to more competent peers.
As a result, some MNCs have attempted to get away with position titles
altogether or at least minimize the position titles to, say, ``team leader’’
for those positions that actually supervise other and ``manager’’ for senior
specialists. Sometimes this approach works; but often, expatriate managers
discover that an unofficial assignment of traditional position titles have
emerged as old ways, particularly in the larger social context, die very
slowly.
Bucking a traditional trend not to provide long-term rewards to individuals,
many MNCs are offering incentive awards, such as stock options, primarily to
retain and motivate key employees and, to a lesser extent, to give these
important staff members a sense of company ownership. What is unique about
Korea, compared to the rest of Asia-Pacific, top management receives an
overwhelming amount of this kind of benefit compared to other levels of
management. Why this is so, it was not clear -- but I would surmise stock
options are often necessary to recruit and to retain top Korean executives
in MNC operations.
So pulling all of this together, Hewitt Associates left us with the
following conclusions: First, in spite of the economic slowdown, MNC salary
increases continue in a competitive game where top players offer above
market to get the best while the rest of the pack plays catch-up so as not
to be out of the game in attracting and retaining talented employees.
Second, while unions and traditionalists tend to preserve the seniority
systems, MNCs are striving to move to performance-based compensation
systems. Be it the execution or communication or both, many performance
appraisal systems are not living up to expectations. Many Korean employees
doubt the fairness of these systems. More work is clearly needed on
management’s part to make these systems fairly applied and appropriately
understood by all ranks of employees. At the same time, these and other
performance-based systems are needed to attract, motivate and retain top
Korean employees.
Third, it remains an ongoing struggle between the ideal: compensation plans
that support the business strategy -- and the legacy: entitlements
predicated on fixed bonuses, job titles and seniority. Many MNC executives
need to do a better job in persuading employees that their long-term welfare
is best served by compensation schemes that underwrite the overall success
of the company rather than simply skimming the cream off the top.
Tom Coyner is president of Soft Landing Korea (www.softlandingkorea.com),
a sales-focused business development firm, and co-author of Mastering
Korean Business: A Practical Guide.
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