"Korean Bank Executives' Compensation System Less Adequate Than US and UK... Concerns Over Short-Term Performance Focus"

Lack of Specific Performance-Based Compensation Metrics
Negative Impact of Cash Payment Focus
Low Correlation Between Executive Performance and Bank's Long-Term Growth

[Asia Economy Reporter Minwoo Lee] It has been pointed out that the executive compensation system of domestic banks is inadequate compared to advanced countries such as the United States and the United Kingdom. The criteria for performance-based pay are not specific, and since payments are mainly made in cash, there is a risk of falling into short-term performance orientation.

On the 20th, the Korea Institute of Finance analyzed this in its report titled "A Study on Executive Compensation and Short-Term Performance Orientation in Domestic Banks." According to the report, as of 2020, the total compensation received by 489 executives of domestic commercial banks was 199.8 billion KRW. Of this, 51.4% (102.8 billion KRW) was paid as performance-based compensation.

The problem is that all banks cited an excessive number of indicators as criteria for performance-based pay. For example, Bank A used indicators such as profitability, soundness, customer base expansion, and internal control to measure performance. Non-quantitative evaluation was disclosed as using the level of management task implementation as a qualitative indicator. Regarding this, Heungjin Kwon, a research fellow at the Korea Institute of Finance, pointed out, "This is significantly different from banks in the US and UK, which disclose detailed evaluation indicators, formulas including target values, and whether targets were achieved." He added, "By listing too many indicators, outsiders could not identify which indicators were key, what the targets were, or whether the actual targets were met."

Concerns were also raised about the high proportion of cash in performance-based pay. Of the 102.8 billion KRW in performance-based pay surveyed, more than half, 52.9 billion KRW (51.5%), was paid in cash. Next, stocks and stock-linked products each accounted for 25 billion KRW (24.3%). In the case of cash and stock-linked products, the number and price of stocks finally decided through performance evaluation are considered, and cash of equivalent value is paid. Although the payment amount is linked to stock prices, it is less connected to performance than stock payments. Research fellow Kwon said, "For performance-based pay to be linked to long-term performance, the pay should be deferred for a certain period, and if the executive is involved in negative incidents during this period, the payment amount should be adjusted or reclaimed." He pointed out, "The deferral period for performance-based pay in domestic banks is mostly three years, which is somewhat shorter compared to banks in advanced countries such as the US and UK."

In fact, banks in the US and UK with similar scale to domestic financial holding companies showed clear differences in this regard. US financial firms such as Comerica and Capital One paid 69.70% (78.97 million USD) of total executive compensation as performance-based pay. Most of this (83.6%) was stock-related compensation. In addition, the payment conditions were disclosed in great detail.

For example, Capital One measured executive performance by dividing it into financial and stock components. Financial performance consisted of two-thirds weight on growth rate of tangible net assets per share and one-third weight on adjusted return on tangible common equity. Stock performance was measured by total shareholder return, with a target to achieve the top 55% compared to 18 competitors' indicators. It was disclosed that achieving the top 80% would result in receiving 150% performance-linked stock. In the case of HSBC Bank in the UK, the deferral period during which performance-based stock compensation could be reclaimed was set at 7 to 10 years, which is more than three times longer than domestic banks.

Research fellow Kwon emphasized, "Strengthening disclosure of executive compensation in domestic commercial banks, extending the deferral period, and considering strengthening executives' stock holdings can prevent being trapped in short-term performance orientation." He added, "Along with this, it is also necessary to improve the personnel system so that bank executive appointments are sufficiently linked to long-term performance."

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