As part of its labor reform campaign, the government is set to launch a drive aimed at transforming the wage systems of domestic financial institutions. As a first step, the Financial Services Commission is pushing to introduce performance-based pay to the nine state-invested financial institutions, including Korea Development Bank and the Industrial Bank of Korea.
Currently, the nine institutions only apply a performance-linked pay system to their executives. For other employees, they use step-based or annual salary schemes. But next year, they are supposed to adopt a reinforced performance-related pay formula for all employees except those on the lowest rung of the corporate ladder.
The commission’s plan is not just to change the pay systems of the institutions. It will push them to build a high-performance culture by applying a performance approach to other aspects of management, ranging from personnel management to employee education and work arrangements.
The commission’s scheme is well advised. There is a strong need to change the organizational culture of these institutions, which are often called “God-created workplaces.” They offer high-paying, low-stress jobs, but their employees are not productive.
These institutions are also often reprimanded by the Board of Audit and Inspection for bending rules to raise wages expediently or offer overly generous welfare benefits to employees.
If the commission turns these institutions into high-performance organizations, the effect will spill over into private financial institutions.
In fact, reforming private financial companies is more important, given their role in the national economy. These companies are among the most sought-after workplaces in Korea, as they offer good paychecks and high job security. But their productivity is not correspondingly high.
Korean banks rank near the bottom in the Organization for Economic Cooperation and Development in terms of productivity. But the average salary of Korean bank employees stands at 205 percent of the nation’s per-capita gross domestic product, compared to 110 percent for their counterparts in the U.S. and 150 percent for those in Japan.
A recent survey showed that Shinhan Bank offered the highest starting pay among Korean companies last year. It paid as much as 55 million won (about $45,100) a year to college-educated new employees. The figure represents the lower end of the income range that defines the middle class in Korea.
Commercial banks have recently begun to use a competency-based approach for personnel management. They promoted a small number of outstanding employees based on merit rather than seniority. But they have been unable to introduce performance-based pay in the face of strong resistance from their trade unions.
To guide private financial companies toward reforms, the government needs to overhaul the organizational culture of the state-run institutions first. But the government also has to overcome resistance from the unions to reform them.
Union leaders have to realize that domestic financial institutions, whether private or public, cannot meet the challenges posed by low interest rates and increasing uncertainty in global financial markets without embracing a performance culture.
