South Korea Under Pressure to Shift from Seniority-Based Pay Structures

Large numbers of employers in South Korea give higher salary increases for senior workers. However, with a rapidly aging society, the new government is encouraging a shift to performance and role-based pay.  

Historical context informs the seniority-based pay structure which is popular in Korea (and until recent years also prevalent in Japan).  As a newly industrialised economy, using an ascriptive pay system made sense in Korean society.  Influenced by Confucianism, which ascribes more power and knowledge through seniority, paying higher wages to senior workers also secured worker tenure and maximised enterprise productivity over the long term.  In 2020, Labor Ministry data showed that 55% of large companies still employed the hierarchical pay system (known locally as ‘hobongje’), and it was more likely to be found at large companies with labor unions. 

However, as companies joined the global economy they gained visibility to Western compensation structures, which focused on paying workers according to their skill, productivity, and performance.  Fast forward to today, there is significant competition between Korean companies for a new generation of workers in Korea.  Younger employees are more concerned with wage growth and compensation transparency and fairness, forcing those companies with seniority wage systems to rethink their approach.

The incoming Minister for Labor, Lee Jung-Sik, has also directed his attentions towards the seniority pay system saying “We need to prepare a reasonable and fair wage system by reflecting the changes of the times, such as demographic structure, working environment, and generational characteristics”.  With estimates that by 2025 the proportion of the population aged 65 and over will reach 20.5%, the current labour model is financially unsustainable for the long term.  

This focus is not unexpected. The recent minimum wage increase of 5% is in contrast to the cumulative 41% over the 5 year period of the former labor friendly President Moon Jae-in.  The new Prime Minister Yoon Suk-Yeol is fundamentally opposed to nation-wide minimum wage increases and campaigned on a platform of reducing excessive labour regulation in favour of the market economy.

Outlook for Employers:  While many global companies with operations in Korea already implement performance-based compensation models, it is important to appreciate the historical context which still informs local management practices. With increasing inflation and soaring house prices, the shake-up of traditional practices and a modest minimum wage increase are likely to have a strong influence on union wage negotiations in the coming years.