The Age Management and Wage Peak System of Korean Firms

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1 The Age Management and Wage Peak System of Korean Firms So-Yeong Kwon (School of Management, Ewha Womans University). Introduction Korea has entered into an aging society and its aging rate has been increasing at an exceptionally high speed. It results from the longer average life span and low birth rate. UN has categorized aging society into three base of the proportion over 65 years old against its whole population. 7 percent is categorized as an aging society, 14 percent is an aged society and 20 percent is a super-aged society. There are differences of population aging between countries, but it is still obvious that they will have a common problem in the near future. <Table 1> Comparison of Aged Population Rate in Major Countries. country Population ratio of over 65 years old Time spent from Entry of 7% Entry of 14% 7% to 14% Japan U.S.A (E) 69 UK France West Germany Sweden Korea (expected) 18 Source: KCCI(The Korea Chamber of Commerce & Industry) As shown in the table 1, Korea faced faster growing aging society compared to other countries and it seems entry to aging society will be faster than we expected.

2 According to 2011 Korea censuses, 5,420,000 people is over 65 years old and it makes 11.3 percent out of the whole population. The number obviously showed that Korea is entering into an aged society. Aging society leads to aging workforce. It is expected to reach 40 percent of total Korean workforce is over 50 years old by 2020 and 50 percent by 2050 (Hanam Bang et al. 2005). <Table 2> Change of Internal Employee Age Year Average age Source: Korean Ministry of Employment and Labor, 2009 Aging society and the workforce require some major changes in Korean firm s human resource management system. Increased number of older workers gives bigger labor cost burden to Korean firms due to their seniority based pay system. Thus many Korean firms have been trying to control labor costs through encouraging various types of early retirement programs. To cope with aging workforce issue, three options are generally considered in Korean enterprises: 1) restructuring of an organization (i.e. early retirement program or lay-off), 2) performance-based compensation system, and 3) wage peak system. While the restructuring and the performance-based compensation system drive immediate cost reduction impact, they can harm the company s long-term success by decreasing employees loyalty toward the company and moral. Companies need to prepare more realistic solutions for aging workforce. Adopting flexible retirement program, which allows workforce changes one s roles and work hours in line with one s life stage changes, can be a good realistic solution

3 for the company. One option for flexible retirement program is Gradual retirement program. Another option can be providing Second career program that helps employees prepare life after retirement in advance. Company can provide profound second career consulting for employees in their late thirty. Third option can be re-hiring process which is hiring experienced retirees back and transferring their knowledge to younger generation workforce. Last option we can consider is Wage peak system. Wage peak system is the most popular program in Korea to mitigate aging workforce issue.. Wage Peak System in Korea 1. Definition of Wage Peak System Wage peak system is defined as providing guaranteed job security to employees with a reduced wage after a certain age. But there has not yet been a strong consensus among stakeholders of Korean firms on introducing wage peak system as one of the major tools for human resource management. Wage peak system can be explained by Lazear s Agency theory. Seniority based system which is the base of Wage peak system pays young workers lower wage than their productivity, but pays more when they reaches middle, old-age according to their age and years of service. However, Lazear pointed that companies cannot take the salary burden as the payment become bigger than the productivity. Lazear argued that it is more reasonable to decide retirement time when the portion of lower salary than the productivity (A) becomes equal to the portion of higher salary than the productivity (B).

4 Wage peak system is a compensation scheme in which employee s payment is adjusted according to the level of stabilization of employment (retirement-security model or retirement- extension model). In Korea, a similar policy has been operated, as an alternative for early retirement for middle-aged and elderly employees with high payment demands primarily by financial institutions, such as a policy of work sharing, since IMF crisis and wage peak officially has been applied by KODIT (Korea Credit Guarantee Fund), in July The policy has recently been revived as a buffer for employment conflicts among the baby-boomers (seven million and twelve thousand people from 1955, right after the Korean War, to 1963). According to KCCI(The Korea Chamber of Commerce and Industry), the implementation rate of the wage peak system has been increasing from 3.3 percent (2006), 4.4 percent (2007) to 11.2 percent (2010). Yet, percentage of adoption of wage peak system is not high (11.2%). The KCCI- Surveys represent that the adopting the wage peak system by Korean companies has increased every year since <Table 3> Adoption rate of wage peak system

5 !!! The employees expressed 71.4 percent of favor on wage peak system based on KCCI survey. Those firms that are adopting wage peak system experienced positive effects such as greater employment security and reduced labor cost. 2. The Effects of Wage Peak System First, the policy increases job security for middle-aged and elderly employees and renders less layoff for firms by adjusting payments according to reduced productivity. Second, firms can keep skillful human resources with lower cost which can create new jobs. Third, the mental and economic well-being of middle-aged and elderly employees expects be increased, as they can meet their desire to work and have economically stable life in relatively longer period. Forth and finally, the policy can solve the issue of a shortage of economically valuable workers, reduce youth unemployment, and mitigate costs of social security. 3. Types of Wage Peak System in Korea Wage peak system operated in Korea is divided into two models: retirement- security model and employment-security model. The former adjusts wages after a certain age is reached to ensure the retirement age established by collective

6 agreement or by employment rules. The latter adjust wages instead of extending employment after retirement and sub-categorizes into retirement-extension model and employment-extension model. Retirement-extension model adjusts the wage level for extended retirement age or an extended period of retirement, based on the precondition of extending companies current retirement age. Employment-extension model refers to a system in which an employee retires and is extended of the employment as a temporary worker. The report of KLI (Korea Labor Institute) in 2008 says that among the companies surveyed, 105 companies introduced wage peak system, in which 31 brought in retirement-security model, 52 retirement-extension, and 22 employmentextension, demonstrating the higher proportion of retirement-security model than the others. <Figure 1> Three models for wage peak system in Korea (Company Survey) Source: Korea Labor Institute (2008). The KLI reports showed that the policy has been introduced mostly in the manufacturing sector in Korea. So far, larger firms with closer cooperation with labor unions are more readily accepting such policy. As for the purpose of the introduction of wage peak system, 59.4 percent of respondents said for easing the burden of labor costs, 50 percent for utilizing the experiences and know-hows of elderly employees, 35.4 percent for relieving middleaged and elderly employees concern on job insecurity, 22.6 percent for boosting employees morale, 18.6 percent for tackling a personnel congestion, and 18.4

7 percent for an alternative for restructuring. For retirement-security, easing the burden of labor costs occupies the highest proportion while employment-extension utilizing the experiences and know-hows of elderly employees, indicating the differential objectives for different types of the system. 4. Cases of Korean Companies A. LG Electronics - Overview : Foundation in 1958, A global leader of technological innovation worldwide with more than 120 businesses and 93,000 employees electronic, mobile communication & home appliances. - Wage peak system background : In 2007, adopted wage peak system to secure employment stabilization and competitiveness by using highquality workers(retirement- extension model). - Wage peak system characteristic : retirement extension(55! 58), calculate severance pay at the age of 55 and 10% of wage cut down every year. Rehire competent workers age of more than 58! B. POSCO - Overview : Korea s the most representative steel company found in POSCO became the world s top steel company in 1998, and privatized in Wage peak system background : : Initiated wage peak system in Jan Current average age of workers is 47. Percentage of workers more than 53 years old will reach 30% in Wage peak system characteristic : Extended retirement age from 56 to 58(retirement-extension model). Wage freezes form 52 to retirement.

8 C. KT(Korea Telecom) - Overview : Foundation in Privatized form government in The largest information and communications service company in Korea. - Policy for Aged- workers : NO wage peak system, but retirement age is 58 and provide re-entry and business start-up assistance program. D. KOLON INDUSTRIES - Overview : Found in 1957, leading company of industrial, electronic materials and fashion business. - Policy for Aged- workers: Deferred retirement and wage peak system is under consideration based labor union request. Retirement age is 56, but after specialized jobs Tech, Elec, Machine, Environment relate to can be extended after 56.. Conclusion In case of Korea, aging has not been perceived as a critical issue yet both in the enterprise and in the government. However, the speedy transformation of Korean society into an aged society requires special attention from the government, company owners and from the unions. Wage peak system should be introduced to guarantee income for a secure and healthy elderly life.

9 The biggest challenge of spreading wage peak system is that there is no clear success stories both in company and employee side yet. From the firm s perspective, they should focus on developing a process that can transfer experience of old skillful resource into company productivity increase. With the knowledge transfer process in place, companies see the direct business impact from keeping old experienced employees with wage peak system and it will make them more aggressive on its implementation. At government level, it is required to increase aids for companies and parties involved and to promote good examples of the system to dispel prejudice toward middle-aged and elderly employees and create atmosphere conducive to employment extension.