"Introduction of Job-Based Pay, Reforming Wage System Aligned with Productivity" [Wage 4.0 Era]

[Wage 4.0 Era]④ Sanghee Lee, Professor at Korea Polytechnic University
"Many Alternative Wage Systems Exist... Structural Issues Are Obstacles"
"Government Must Actively Create an Environment for Wage System Reform"

[Asia Economy Reporters Nahum Kang and Seungjin Lee] In major European countries, wages are determined not by 'which company' but by 'the work performed.' Because wages are set according to job roles, wage disparities between companies are minimal. In contrast, in South Korea, wage gaps between large corporations and small and medium-sized enterprises (SMEs), regular and non-regular workers, and long-term employees and new hires are inevitably large. Even when performing the same work, wages differ significantly depending on employment status and seniority. As labor unions within companies grow stronger, these disparities are widening further.

There are concerns that maintaining the current wage system, which features one of the highest levels of seniority-based pay worldwide, will cause serious social problems. Intergenerational conflicts arise from high wages paid simply due to long tenure without working, along with reduced youth employment creation and pressure on older workers to retire early, potentially shaking the social foundation.

To address these issues, a reform toward a productivity-based wage system is necessary. Given that the current wage system has persisted for decades and several reform attempts have failed, active government initiatives are being called for to restructure the wage system.

Professor Seungguk Jeong, who advised President Yoon Seok-yeol on labor policy: "Let's ease seniority first in the public sector"

Seung-guk Jeong, Professor at Central Buddhist College

In April 2021, after resigning as Prosecutor General, President Yoon Seok-yeol met with Professor Seungguk Jeong of the Central Sangga University. This was the first expert meeting after deciding to run for president. President Yoon's request at the time was for measures to create youth jobs and resolve labor market polarization. After a four-hour discussion, Professor Jeong provided research materials he had been working on. It is known that Professor Jeong advised a flexible security model that grants employers freedom to dismiss to enhance corporate competitiveness, while providing government support and reemployment opportunities to dismissed workers to ensure job stability, as well as improvements to the wage system to resolve the dual labor market structure.

Professor Jeong argues that for the Korean labor market to change, the seniority-based wage system centered on step-based pay must be reformed first. He emphasizes that the most effective means to eliminate wage gaps between large corporations and SMEs, regular and non-regular workers, and gender wage disparities is the introduction of job-based pay. Raising starting wages for youth and increasing wages for non-regular workers and women through mid- to long-term wage system reforms have become the most important future tasks in the labor market.

Professor Seungguk Jeong of the Department of Social Welfare at Central Sangga University stated, "Korea has an exceptionally high seniority-based wage system compared to the rest of the world," and emphasized, "Lowering seniority is essential to solve various issues such as discussions on extending retirement age." He explained, "There are various alternative wage systems such as job-based pay in Europe and role-based pay in Japan, but it is difficult for the government to lead and reform these systems."

He added, "However, in the public sector, if there is the will, easing seniority is possible immediately. Also, if companies receiving support from the Korea Development Bank include clauses for wage system reform, gradual changes can occur, so the government should work to build consensus for easing seniority."

The proportion of step-based pay increases as company size grows

Sanghee Lee, Professor, Department of Knowledge Convergence, Korea Polytechnic University

Professor Sanghee Lee of the Department of Knowledge Convergence at Korea Polytechnic University analyzed that unlike overseas, seniority wages have been continuously strengthened and maintained. Especially, the step-based pay system, which is the basis of seniority wages, requires the financial capacity to provide additional compensation proportional to tenure, so the larger the company, the higher the proportion of step-based pay.

Professor Lee explained, "Seniority wages are mainly maintained in large corporations and the public sector where the ability to pay is assured. Labor unions also find seniority wages the easiest benefit to secure through effective struggles."

According to the annual status of step-based pay adoption and operation by company size from the Wage Job Information System, the overall proportion of companies adopting step-based pay slightly decreased after 2017. However, for companies with over 1,000 employees, the adoption rate of step-based pay slightly increased between 2019 and 2020.

Despite many large companies expanding the adoption of annual salary systems, the increase in step-based pay adoption among companies with over 1,000 employees reflects how deeply rooted step-based pay is in Korea's wage system. Especially, the increase in seniority in large enterprises leading the industry is expected to act as an obstacle to wage system reform.

"Structural issues must be considered for wage system reform"

Korea's high seniority has been continuously pointed out by various experts over the years. Nevertheless, wage system reform has not been achieved due to structural problems in the country.

Professor Lee analyzed, "Korea has a company-centered seniority wage system similar to Japan, but unlike Japan, it lacks wage curve-type personnel management or inter-company adjustment practices, is not a sectoral collective bargaining wage system like in Europe, and is not a market wage-reflective structure like in the US or UK."

He continued, "Even in Japan, where seniority wages are deeply rooted, an alternative wage system called 'role-based pay' has emerged to significantly reduce seniority and reflect productivity. The problem is that domestically, there are no suitable means to improve alternative wage systems."

Under current law, converting step-based pay to job-based pay is highly likely to be considered a disadvantageous change in employment rules or a revision of collective agreements, so it must ultimately rely on voluntary wage system reform by labor and management parties.

Professor Lee emphasized, "Alternative wage systems are well known through overseas cases and most prior research. The future issue is how to build voluntary willingness between labor and management in Korea to improve the wage system to align with productivity. The government also needs to actively create an environment for wage system reform even if results are not immediately visible."

Growing possibility of retirement age extension... wage reform must be expedited

As the current government is promoting a plan to extend the statutory retirement age from 60 to 65, Professor Lee also analyzed that the current high seniority is the biggest obstacle to this.

Professor Lee pointed out, "The possibility of pushing for a 65-year retirement age is increasing, and the biggest issue to overcome in Korea is the seniority wage system." He explained, "Especially, extending retirement to 65 is clearly very negative for youth employment, which is already difficult, so the ultimate way to absorb this shock is to reform the wage system to align with productivity."

For reforming the wage system based on productivity, Professor Lee proposed a soft landing plan that gradually weakens seniority over about ten years. He said, "Considering the characteristics of workplace wage systems in Korea, there is a stark contrast between large corporations and public sector workplaces with strong seniority-based step pay and SMEs with almost no seniority. Therefore, for the 65-year retirement extension, it is necessary to consider implementing it first in SMEs, where the negative impact is less, rather than starting with large corporations and the public sector."

Additionally, Professor Lee stated, "Even if retirement extension is ultimately implemented in large corporations and the public sector, it should be applied on the premise of implementing a wage peak system that meets certain criteria, based on experience with the 60-year retirement age."

Illustration by Seongsu Oh gujasik@

This content was produced with the assistance of AI translation services.