Samsung and SK Hynix Take Different Paths on Performance Bonuses... What Is the Controversial 'EVA'? [News Seolcham]

Differences in Bonus Calculation Methods Ignite Debate
EVA, Introduced After the IMF Crisis, Becomes Central to Samsung's Bonus Controversy
Complex Formula Fuels Employee Frustration and Lack of Consensus

Editor's Note'Seolcham' is a newly coined term meaning 'please refer to the explanation for more details.' In [News Seolcham], we aim to pinpoint and elaborate on parts of the news that require fact-checking or further explanation.

SK Hynix has revised its performance bonus system to allow for record-breaking bonuses of over 100 million won per employee, sparking increased debate over how large domestic conglomerates calculate performance bonuses. The Samsung Electronics labor union has raised issues with the Economic Value Added (EVA) method, which has traditionally been used to calculate bonuses, and has called for a reform of the system. Why has EVA, once the standard for assessing corporate performance, become the center of the performance bonus controversy?

Controversy Sparked by Differences in Bonus Calculation Methods

Employees are leaving work at the SK Hynix headquarters in Icheon, Gyeonggi Province.

Both Samsung and SK Hynix operate performance bonus systems that return excess corporate profits to employees. At Samsung, this is called the Over-achievement Performance Incentive (OPI), while at SK Hynix, it is known as the Profit Sharing (PS) bonus. However, the specific calculation criteria-namely, the detailed method for defining the 'excess profit' that determines the total bonus pool for employees-differ between the two companies.

In the recent labor-management agreement, SK Hynix abolished the cap on PS payments (previously up to 1,000% of base salary, or 50% of annual salary) and decided to allocate 10% of annual operating profit as the total bonus pool each year. According to securities industry estimates, SK Hynix's average operating profit for this year is projected at 39 trillion won, and the semi-annual report lists 33,625 employees. This means each employee could receive a bonus exceeding 100 million won.

In contrast, Samsung calculates performance bonuses using the EVA method. EVA refers to the added value generated by a company's business activities, and is calculated as 'net operating profit after tax (net profit) minus capital costs (corporate tax and investment capital).' Despite this seemingly simple explanation, the actual EVA calculation formula is complex. For this reason, the Samsung Group's super-company labor union criticized in a letter to management that "EVA is a performance bonus system so opaque that no employee can understand how it is calculated."

Accurately Reflects Corporate Profitability, But Complex Formula Hinders Consensus

The complexity of the EVA calculation arises from capital costs. Capital costs are divided into 'cost of debt' and 'cost of equity,' both of which are considered in the EVA formula. The cost of debt includes expenses incurred when a company raises funds through loans or corporate bond issuance, such as interest payments on borrowings. The cost of equity refers to the return paid to shareholders when a company raises funds through issuing stock, with dividends being a primary example.

Both bond interest rates and dividend yields fluctuate depending on the capital-raising environment. Lenders demand higher returns in proportion to the risk of repayment, which means the risk premium increases. Since EVA's capital costs take all these factors into account, understanding the calculation is difficult without specialized financial and accounting knowledge.

According to "Corporate Management by EVA," a report published in 1997 by the Hyundai Economic Society Research Institute (now Hyundai Research Institute), EVA became a focus of study at American business schools in the late 1980s and was originally used as a tool to enhance corporate value in the United States. In Korea, however, large corporations adopted EVA as part of management reform after the IMF financial crisis. Korean conglomerates actively used EVA to calculate employee bonuses, and the report explained, "Since EVA represents corporate value, linking EVA to compensation establishes a direct relationship between corporate value and wages."

SK Hynix Headquarters Building. Photo by Yonhap News

However, the aforementioned complexity of the EVA formula has always been a stumbling block. If the capital cost rate is high, EVA can decrease regardless of the company's operating profit, resulting in lower bonuses even during boom periods. A representative example is SK Hynix in 2020: operating profit increased by 84%, but EVA remained weak, so bonuses lagged behind those of competitors. As a result, SK Hynix abolished EVA in 2021. In this year's wage negotiations, labor and management agreed to allocate 10% of annual operating profit as the bonus pool, with 80% paid in the current year and the remaining 20% distributed in two installments of 10% each over the following two years.

Shin Jaeyong, a professor at Seoul National University, wrote in a column on the business school website, "Conceptually, EVA, which represents excess profit after deducting the share for capital providers, is superior as a basis for calculating performance bonuses." However, he pointed out, "The main reason for employee dissatisfaction and confusion is that management failed to share information with employees in a timely, transparent, and convincing manner."