Despite Concerns Over Real Estate PF Defaults, Securities Firms Award 350 Billion KRW in Bonuses... Financial Supervisory Service Steps In

Inspection of 22 Securities Firms... Last Year's Performance Fees 352.5 Billion KRW
"Focus on Short-Term Results, Deferred Payments Not Followed"

Despite concerns over the insolvency of real estate project financing (PF), securities firms have reportedly paid their employees performance bonuses amounting to hundreds of billions of won. Most of the employee performance bonuses were paid in cash, with some not deferred, indicating a focus on short-term performance. The Financial Supervisory Service (FSS) has initiated individual guidance to ensure the proper operation of the performance compensation system.

On the 24th, the FSS announced that it had inspected the payment status of performance bonuses and compliance with regulations for 22 securities firms exposed to real estate PF risks and subject to the Governance Act. The inspection revealed that the total amount of performance bonuses related to real estate PF paid by the 22 firms last year was 352.5 billion won. Although this was a decrease of 193.3 billion won compared to the previous year, the amount still remained in the hundreds of billions. Previously, concerns had been raised that excessive performance bonuses were paid to employees responsible for real estate PF amid ongoing risks of insolvency.

The amount of deferred performance bonuses that were not paid due to company losses or other reasons increased from 6.4 billion won the previous year to 32.7 billion won. For securities firms that received liquidity support in the second half of last year, performance bonuses decreased from 97.8 billion won to 77 billion won, while the adjustment amount increased from 300 million won to 23.6 billion won.

However, it was found that many securities firms violated regulations when paying these performance bonuses. According to the law, the performance compensation system for employees involved in real estate PF should be linked to long-term performance, but some firms prioritized short-term results.

For example, under the Governance Act, performance bonuses should be paid in stocks or similar instruments linked to long-term performance, with at least 40% deferred for more than three years to ensure alignment with long-term outcomes. However, the inspection found that many securities firms paid the entire performance bonus in cash and set the deferral period shorter than the legally required three years.

In particular, employees responsible for real estate PF or financial investment operations ignored the rules on deferred payment of performance bonuses. Among the 22 firms, 17 paid the entire performance bonus as a lump sum if the total amount was below a certain threshold.

Securities firms must consider the individual characteristics of each real estate project, such as structure and business type, when calculating performance bonuses, fully reflecting the risk attributes and levels of each PF transaction. However, five of the 22 firms did not recalculate performance bonuses to reflect losses even when losses occurred.

The FSS plans to provide individual guidance to securities firms with deficiencies to ensure that the performance compensation system is established and operated in accordance with the law. It will also encourage voluntary improvements and the establishment of proper market practices related to performance bonuses through the Korea Financial Investment Association and other channels.

An FSS official stated, "It seems that securities firms have continued the practice of not deferring payments below a certain amount even though the voluntary standards previously operated by the association were abolished. Rather than imposing sanctions, we plan to improve the situation through individual guidance."

Additionally, the FSS will discuss with the Financial Services Commission ways to enhance regulatory effectiveness, including clarifying some provisions. Currently, when deferred bonuses are paid, they can be paid in stocks, stock-linked products, or other reasonable methods determined by the company, so paying 100% in cash is not necessarily considered a violation of regulations.

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