5.4 to 6.1% salary increases expected for 2012 in Korea

McKinney Execublog

Two separate but recent studies indicate that private sector salary increases in Korea for 2012 are expected to average somewhere between 5.4 to 6.1%. One report came today in an article by Yonhap based upon a survey by the Korea Employers Federation. Another separate report appeared recently in the Korean Times reporting on the Aon Hewitt Korea Salary Increase Survey 2011-2012. This study compares data not only in Korea but comparisons with other Asian countries. This comparison with other Asian countries makes the data more relevant to businesses in Korea.

Private sector salaries to increase 5.4 pct next year

SEOUL, Nov. 20 (Yonhap) -- Salaries of workers in South Korea's private sector will increase 5.4 percent on average next year, a survey showed Sunday.

According to a survey by Korea Employers Federation (KEF), 764 private companies that hire more than 100 workers have agreed to give a 5.4 percent salary hike to workers for next year.

Rewards trend in transition

October 21, 2011 (Korea Times)
By Diana Yang

Korea’s labor force well positioned due to talented professionals

In the Asia-Pacific region, most countries are either major emerging markets, or developed markets with strong linkage to emerging markets hence benefit from its growth. It will take time for the developed countries to fully recover. By contrast, strong growth and high commodity prices will put upward pressure on wages and inflation in many emerging markets.

In 2011, most of the markets are facing similar problems they had before the crisis: talent turnover, inflation, currency appreciation, and increased labor cost. Aon Hewitt 2011 – 2012 Salary Planning survey shows that half of the countries in Asia-Pacific experienced salary increases close or higher than 6%, most of them emerging markets. However, it is noticeable that mature markets such as Hong Kong, Singapore and Australia also experience 4-5% increase, as shown in Figure 1.



South Korea Outlook

Despite persistent difficulties in youth employment, Korea’s job market as whole continues its trend of gradual improvement. In a second quarter research paper, Radford, an Aon Hewitt subsidiary, reported more than 40 percent of technology companies expected their Korean workforce to increase by at least 5 percent in the next 12 months. Stronger workforce growth is expected in the life science industry as well.

Consequently, turnover is rising in Korea. The average attrition rate for participating companies is 14.6 percent, as expected, and is higher than turnover rate for 2010 (11.1 percent). Similar to last year, the major reason for attrition is better external opportunities. Other key reasons include external equity of compensation, limited growth opportunities, and further studies.

Given this talent landscape, we observe some features in Korean market rewards trends, such as Total Rewards Approach, Salary Increase, and Shifting to Performance-Driven Pay.



Total rewards approach

There is a noticeable trend towards the more integrated approach of “total rewards.” In addition to cash compensation, organizations are starting to focus more on the value of benefits and non-financial reward elements such as self-development opportunities, and better work environment and work-life balance

Since the public pension system has been introduced into Korea, the size of the retirement pension market has enlarged rapidly and more features of pension plans have become available and an important element in benefits portfolio. We observed very comprehensive paid-time-off policy and wellness programs among Korean companies, especially in the technology industry. Flexible benefits are offered to allow employees choice while capping benefits cost. Benefits have now become a tool for employers to communicate their concern for employees’ welfare.

Equity programs such as global motivation and retention tools, are quite popular among technology sector companies, too. It has been a slow and steady transition but, within these technology firms, Restricted Stock Units (RSU) have replaced stock options as the vehicle of choice. Within life sciences, we see an increase in RSU usage but stock options are still widely offered. Across both industries, RSUs are used more heavily at the lower levels.

In terms of retention programs, the most popular retention measures are: Accelerating Career Opportunities, International/Cross Functional Mobility, and Timely and Meaningful feedback by managers.

Salary increase

Consumer price index (CPI) inflation of above 4 percent year-on-year for six straight months has eroded any government claims for a 3 percent target, thus adding more pressure on companies’ salary increase budgets.

According to the recent Aon Hewitt Korea Salary Increase Survey 2011-2012 report, average salary increase is at 6.1 percent in 2011 across all levels and the projected 2012 salary increases is 6.1 percent. The highest salary increase was in the engineering/ manufacturing sector at 7.9 percent, closely followed by financial services at 6.6 percent, and automotive at 6.3 percent. The transportation/logistics/shipping and consumer goods expected increases of below 6 percent, as the slowdown in global demand is weighing down on exporters.

Economists have tempered the 2011 and 2012 forecasts as the slowdown in export demand looks set to weigh on production from the second half of 2011. The long-term outlook is strong as Korean corporations are well placed to benefit from the upturn in emerging markets.

Shifting to performance-driven pay

Compensation practices in South Korea reflect a strong pay equality mind-set and historically have been based on seniority. In the past, variable pay and long-term incentives were not common; this is changing, however, and the trend is towards performance-based pay.

The 2011 Aon Hewitt Variable Compensation Measurement Report shows that variable pay plans are increasingly becoming a critical component of most participants’ total compensation offerings. Companies are increasingly turning to variable pay as a means to attract, retain, and reward performance under uncertainties in the global environment. This is an alternative to traditional merit increase which might result in a rigid cost structure.

Business incentive plans are most prevalent due to the fact that they can balance company, team and individual performance, followed by special recognition plans. Stronger emphasis on individual performance, less tolerance of the average-oriented mind set, self-funded plan design, and well-organized plan communication are critical to the success of any variable pay plan.

Future outlook

While the global economy is undergoing another period of uncertainty, many multinationals are reviewing their business strategy globally and sourcing for talent globally. Countries with good talent availability, talent quality, talent environment, and reasonable talent cost, will be positioned positively during this global competition.

Korea’s labor force is positioned very well due to a few factors ― a professional and well- educated workforce, reasonable cost of labor, willingness to travel and relocate, and highly committed to company success. It will benefit from emerging neighboring markets due to culture similarity and geographic proximity.

Diana Yang is the Regional Compensation Practice Leader in the Technology Sector of Aon Hewitt Asia Pacific.