January 2010

By Dr. Kim Ki Ryung 

As Korean companies prepare for the New Year amid the current economic climate, many are adopting an aggressive management strategy to greet 2010. This proactive strategy is focused primarily on new growth drivers, new markets, and securing key new technologies for the business. For continuing business segments, companies are likely to stress securing greater productivity and efficiency. Thus, the main thrust for 2010 onwards will be achieving a fine equilibrium between aggressive management (for new opportunities) and a disciplined focus on contingency management (to avoid unnecessary risks).

What will 2010's emerging HR issues be? The tension between labor and management will remain high. Labor and management will continue to have different perspectives on the appropriate level of bonuses and wage increases. Many large conglomerates performed better than expected in 2009; hence, employees are looking ahead to higher bonuses. On top of that, employees also will expect 2010's wage increase to be higher to make up for last year's wage freeze or wage cut.

From the vantage point of the company, the main question is: Was 2009's improved performance a direct result of employees' performance? Employers are asking if external factors (e.g., exchange rates that are advantageous to Korean exports, the continued growth of China, relatively low prices of raw materials, and low interest rates) were the main drivers of the improved results. If external factors were the causes for improvement, is it appropriate to award a higher bonus? Employers will also be wary of allotting high fixed-wage increases when there are still uncertainties in both the local and global economic environment.

As employers dwell on these issues, they will be forced to determine the impact of rising wages on the company's competitive position and how to maintain a reasonable cost structure. Labor and management tensions will continue to drive a wedge between employees and business owners unless an amicable compromise is reached.

Some of the most contentious issues are discussed below along with a forecast on what HR professionals can expect in Korea in the year ahead.

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Room for differentiation

As Korean companies pursue a performance-based culture, providing less compensation in an environment where growth has been significant will not be an appropriate response. Companies seeking to reward key performance will thus have to focus on differentiation of rewards, where compensation is built around variable rewards, such as bonuses, to acknowledge the contribution of those who have performed rather than giving a blanket fixed-wage increase for the entire workforce. There is expectation in the marketplace that bonus growth will be higher this year compared to growth in basic wages.

Expect more grumblings from unions as differences between labor and management will deepen this year. A company faced with financial difficulties may find it easier to reach an agreement with a more sympathetic union. Nevertheless, discussions between union and management, or group wage discussions, will be highly contentious.

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Future of multiple unions

The planned introduction of new legislation allowing a company to have multiple unions has been postponed until July 2011 but from July 2010, the legislation will prohibit a company from paying a full-time labor union activist a salary, although a union worker will be allowed time off for union work.

According to The Korea Times, the bill is expected to pass the National Assembly despite a lack of support from the nation's largest umbrella union group and opposition parties. The Federation of Korea Trade Unions (FKTU), the Korea Employers' Federation (KEF) and the Ministry of Labor agreed to delay the implementation of multiple unions by two years and six months, and introduce the wage ban from July 1, 2010. 

A report done by the Korea Chamber of Commerce & Industry (KCCI), the nation's largest business lobby group, showed that 71 percent of the 300 foreign firms surveyed on this issue were against the plan for multiple unions within a company. 

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A switch to pensions

Another HR issue that will be of concern is that of retirement pensions. Starting in December 2005, Korea has had employee retirement income security. From 2011 onwards, retirement pension will replace trust and retirement insurance. Severance pay reserves are normally treated as full expenditure but the expenditure allowed for the reserved retirement fund has been reduced to 30 percent from 40 percent. Many companies are expected to switch into a retirement pension system in 2010 to cut down on corporate tax. To make the switch, a company needs to obtain consent of more than half of their employees and submit a retirement pension constitution to the Ministry of Labor. An active communication program and a training program will have to be in place.

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More M&As

Expect to see a flurry of mergers and acquisitions (M&As) this year. During the last Asian financial crisis, foreign companies undertook the rescue of many domestic companies. This time round, rather than foreign investors acquiring Korean companies, there will be more mergers among domestic companies and more acquisitions of companies outside Korea by Korean companies. Mergers and acquisitions will take place for various reasons. These include: the integration and realignment of businesses in the face of new competitive landscapes; ventures into new businesses; expansion into emerging markets; economics of scale; the search for new intellectual property, and the quest for new research and development.

Previously, the HR Department's participation was confined to the pre-research (due diligence) and the integration stage. However, in recent years, HR's role has been expanded to include setting the workforce's strategic direction, deciding on the structure of the M&A, configuring, integrating and running the combined HR systems, and managing change, among others.

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HR at a crossroads

Going into the future, Korean companies will need to further develop their unique corporate DNA and change management programs to build a sustainable, ethical and ecological operation for the future. More economists are beginning to realize that a strong corporate culture, which facilitates higher work commitment, will lead companies to greater success. In addition, companies with a strong corporate culture have a higher competitive advantage in terms of stock price, performance and brand, compared to their peers who do not. This is a strong endorsement that performance is ultimately a product of culture. Today, corporate business and social responsibility must go hand in hand. Only when companies deliver on their corporate duty to produce a sustainable business will the basis of a strong corporate culture be created. The focus of developing a unique corporate culture must go hand-in-hand with the other HR concerns such as talent management, an appropriate compensation policy, an efficient support function, a performance-based management system, a practical hiring process, and an up-to-date HR benchmarking system to help define what success looks like.

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Contact

Please contact Dr. Kim at charlie_kim@aon-asia.com for more information about how Aon Consulting can assist you in Korea addressing these issues within the specific context of your business.

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