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backGLOBALtalk April, 2012

Korea's Reward Trends in Transition

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 benefitting from its growth. It will take time for the economies of the developed countries to fully recover. By contrast, strong economic 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

that they had before the crisis: talent turnover, inflation, currency appreciation, and increased labor cost. Aon Hewitt's 2011-2012 Salary Planning survey shows that half of the countries in Asia-Pacific experienced salary increases equal to or higher than 6 percent, most of which are emerging markets. However, it is noticeable that mature markets such as Hong Kong, Singapore and Australia also experienced a 4-5 percent increase.

To view graph, please click here.

South Korea

Despite persistent difficulties in youth employment, Korea's job market as a whole continues its trend of gradual improvement. In a second quarter research paper, Radford, an Aon Hewitt subsidiary, reported that 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 the 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 noted some changes in Korean market rewards trends, in terms of total rewards approach, salary increases, and shifts to performance-driven pay.

To view graph, please click here.

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, a 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. More pension plan features have become available and form an important element in a 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 give employees a choice while capping benefits cost. Benefits have now become a useful 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 2011-2012 Aon Hewitt Korea Salary Increase survey, 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 and 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 industries 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 remains 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 amid uncertainties in the global environment. This is an alternative to the 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 mindset, 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 several factors — a professional and well-educated workforce, reasonable cost of labor, willingness to travel and relocate, and highly committed to company success. Korea will benefit from emerging neighboring markets due to culture similarities and geographic proximity.

Source: Aon - GAI

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