[Initial Insight] PF Industry Needs to Revise 'High Incentive' Structure

Offering High Salaries to Secure Talent
Not Hesitating to Bear Risks
Need to Identify and Fix Causes of the Bubble

The year-end atmosphere in the securities industry is grim. A cold wind is blowing fiercely through the stock market, which had been thriving for years. As the investment banking (IB) sector faces difficulties, most securities firms have either carried out, are carrying out, or plan to carry out restructuring to some extent. Disputes with investors or investment partners are also occurring in various places.

Various unfortunate news and rumors (unconfirmed reports) are heard everywhere. Recently, the obituary of a young executive at a securities firm, who had been doing well with real estate project financing (PF), was announced. Soon after, rumors spread via messenger that he had taken his own life. The diagnosis of the cause included personal investments in development projects that had become irrecoverably tangled, compounded by restructuring. Earlier, news was reported that a fund manager at an alternative investment management firm committed suicide due to poor performance. There are also reports that a 'big client' who entrusted a large sum of money to an investment project at a securities firm assaulted the executive who was their investment partner. Since everyone is keeping quiet, the truth is unclear, but the victimized securities firm executive reportedly underwent major surgery on their face. The powerful client who exerted violence is known to be connected to a construction development project.

Similar stories are too numerous to mention individually. Many are based on facts, though some messengers may have exaggerated. What is noteworthy is that most of the subjects of these rumors belong to the real estate PF or related alternative investment sectors. These are people who have appeared on the annual public list of financial investment industry employees earning over 500 million KRW in salary for several years. Including bonuses, their annual salaries have reached 2 billion, 3 billion, or even 4 billion KRW, surpassing the salaries of many securities firm presidents long ago. Roughly estimated, in the past five years, the PF industry has seen a surge in employees earning over 1 billion KRW annually.

This is not to disparage the fruits of their expertise and fierce competition despite the worsening market conditions. However, it is hard to deny that the high-incentive structure in the PF industry played a role behind the securities firms’ concentration on PF and the series of liquidity crises. In the process of aggressively securing PF personnel from banks, savings banks, and construction companies with the greed of 'rowing when the tide is in,' a high-incentive structure that disregarded investment risks was established.

This was also the case a few years ago when an entire PF sales team from one securities firm moved to another small- to mid-sized securities firm. The team was offered a significantly higher profit-sharing rate for PF-related income to induce the move. The offer also included a promise to settle all incentives that were to be paid over the next five years at the previous firm in a lump sum. There was no reason to refuse since they would receive incentives they would otherwise lose by moving and enjoy a much higher profit-sharing rate. Even 1% of a 1 trillion KRW loan amounts to 1 billion KRW.

They were eager to provide funds for development projects during the real estate boom, aiming for high incentives. They did not hesitate to bear risks personally and on behalf of their companies to secure deals. The more risk they took, the greater the profits. As the boom continued for a long time, those who warned about PF risks gradually disappeared. Those who caught the eye of strong sales team leaders and worked for several years from assistant manager level bought 'Ferraris' and leveraged to purchase multiple real estate properties.

The long-lasting party amid the bubble has ended. Authorities hastily injected large-scale liquidity to rescue private companies lacking self-sustainability. Although the market has somewhat stabilized, risks of PF defaults remain due to unsold properties and other factors. While putting out urgent fires is a priority, efforts must be made simultaneously to uncover and correct the causes of the bubble, such as the irrationally high incentive structures. This is to prevent repeating the same moral hazards when another boom comes.

Jungsu Lim, Deputy Head of Securities Capital Markets Department

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