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Dec 10, 2013

Severance Payments in Korea: Death to Korea's Competitiveness by Tom Coyner

Getting what you want and doing as you wish offers immediate gratification, but these short-term rewards may lay the foundation for long-term disaster. There are two areas that come to mind regarding Korean business practices.

Recently, a Financial Times article on revised Korean compensation calculations was widely circulated among long-term Western expats here. It generated much discussion as this whole issue could have a major impact on the labor costs of doing business in Korea. I remember when I was hired by the Chase Manhattan Bank in Seoul during the 1970s, I was offered an annual salary divided by 14 payments to allow for 12 monthly payments plus two one-month payments scheduled for June and December.

I uniquely asked for and got the same annual compensation divided by 12 and paid out monthly sums the so-called semi-annual bonuses. So, in a sense, these scheduled bonuses that normally are consistently paid out could be considered part of one’s base pay. But as we have seen during extreme economic depressions, such as in the 1997-98 “IMF Crisis” and in 2008, not paying out the scheduled bonuses without touching the monthly salaries can be one of the first lines of defense of a company’s financial well-being.

The rub is that monthly salaries - not the total annualized base pay - have formed the basis for overtime, unused holiday compensation and severance pay. As such and with this understanding, the salaries have been allowed to rise within this structure. Whereas to suddenly switch the base for various benefit payments could lead to major financial problems for both Korean and foreign companies.

To make matters worse for Western companies operating in Korea, such a compensation reform move could be the last straw that breaks the back for major foreign employers. Unlike the typical, smaller foreign operations of, say 100 employees or fewer that is most commonly managed at the top by a bilingual Korean, the larger organizations with their larger spans of control and greater management complexities tend to still bring in expatriate executives and specialists.

Often these foreigners lack any or adequate Korean language skills. To offset this issue, bilingual staff members interpret much of what is happening, often effectively insulating the expatriates from much of the daily operations. The ongoing irritation and potential major problems come if the organization lacks the internal discipline for internal communications to be consistently communicated - particularly in written form - in English.

For the Koreans, one can empathize with the hassle of writing English e-mail and reports.  But given they have voluntarily joined an international organization, one’s sympathy can only go so far. The Korean staff may as well be writing in relatively indecipherable code for the rest of the global organization whenever they write in Korean.

This local practice is a major hindrance for their foreign senior management to adequately monitor what is happening in the ranks, and in times of crisis, to audit what was the cause of the problem. Korea is hardly alone. I once worked with a major international consumer goods company in Japan that had multiple layers of bilingual Japanese staff buffering foreign executives from the real operations at their Asia-Pacific head office in Kansai. Finally, the situation became so intolerable that once an opportunity presented itself, the company relocated its regional office to Singapore. My point is that there are other Asian countries than Korea, including even China, where the staff may work at cheaper wages and are more willing to communicate and document routinely in English.

Unfortunately for many Korean employees, often all of this is lost upon or not taken seriously enough by union and other local leaders. For all that Korea has to offer as a place for investment, the country hardly holds a monopoly in Asia for foreign companies. Consequently, western companies have relocated from Korea in the past and could well do so again in the future. Getting back to changes in compensation practices, while in the U.S., President Park Geun-hye told American executives that she was aware of the employee compensation issue and U.S. management’s concerns. She said she would look into the matter upon her return to Korea.

 As much as Korea is increasingly becoming integrated into the global economy, it is clear that many of the nation’s leaders are being caught off guard by various forms of globalism. Well, they are hardly alone. But Korea needs, more than most countries, to find ways to better integrate its communication and compensation practices for the nation’s long-term welfare.

Korea long ago stepped away from other Asian countries by offering low-cost labor competition. As the nation has climbed up the food chain, naturally wages have increased. But in doing so, knowledge and other workers’ productivity has become of greater concern - not only domestically, but also internationally. And that now means Korea is facing off with competition from China and India where similar, if not lower, wages are more often complimented with a greater readiness to conduct day-to-day business in English.

Without far-sighted leadership, the Korean market may someday be characterized by small or, at best, medium-sized foreign investors whereas the international big players will be located elsewhere, relegating Korea to remain as a secondary if not tertiary international market.

*The author is president of Soft Landing Korea, a sales performance consulting firm, and senior advisor to IPG Legal.  The article, originally, appeared in the Korea Joonang Daily.

info@ipglegal.com
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SeanHayes@ipglegal.com

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.

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