Salaries Up Despite Underperformance

According to a survey of 64 companies in 10 industries on the stock exchange in 2005, 20 companies (60.6%) raised salaries for registered employees out of a possible 33 companies that had lower profits in 2005 compared to 2004.

Among these, 6 companies had lower allocation tendencies than before. The allocation tendency is the ratio of allocation to net income, and generally the higher the allocation, the more shareholder-centered the company is evaluated as.

Despite poor performance, 18 companies (54.5%) increased their total compensation budget. Most of the companies on the list had raised or maintained their compensation rate regardless of performance for the past three years.

The reason, companies say, is, “The compensation budget is just that; it’s not the real amount.” Others responded, “We’re lower, compared to other companies.”

But the current trend of increasing compensation despite lower profits is gathering criticism.

Korea Investment Trust Management president Kim Beom-suk pointed out, “Opposition votes were raised against the 18 companies that had increased compensation, out of the 120 companies that were invested in last year. The board should have a strict policy for the compensation problem.”

Inadequate Policies-

Because investors are unaware, companies can get away with their practices. This is because only the total compensation amount is publicly announced. Also, the actual amount needs only be passed through the board of directors.

In addition, most companies do not offer any explanations for their increased compensation budgets, and there is no categorization for the levels of compensation.

These kind of declared policies go against the international trend.

The headquarters of Coca Cola in the U.S. has decided that compensation can only be increased if net profits per share exceed eight percent for the recent three years. General Electric has introduced bonuses instead of stock options.

After the “Enron fiasco,” in which innumerable employees were able to escape with $55,000,000 worth of bonuses despite bankruptcy, U.S. companies and regulators have become wary.

The U.S. originally publicly announced compensation budgets, and therefore has stricter policies compared to Korea. Even so, the Securities and Exchange Commission has reinforced its policies for the boards of stock companies, such as announcing compensation for the past three years.

Chairman Christopher Cox of the SEC explained, “This is for the investors, so that they can access accurate information and evaluate their options.”

Controversy Surrounding Current Policies-

The Korean companies on the stock exchange announced their compensation through general stockholders meetings or official reports.

Recently, 10 assembly members have made a move to revise stock policies to force companies to publicly announce individual compensation rates, stirring up controversy.

Hyun Seung-soo of the Finance and Economy Committee said, “Compensation for board members is important investor data. If the current practice of revealing only the total amount continues, domination of the board may arise and fair compensation will not be possible.”

In response, Korea Securities Research Institute researcher Roh Hee-jin said, “If we do divulge that kind of information, there is the possibility of discord with the labor union. All of this can be resolved if the top investors make themselves heard at the general meetings.”

Im-Sook Ha TK Sohn artemes@donga.com sohn@donga.com