By Toby Kim
South Korea recently enacted new disclosure rules for individual compensation of registered directors. Companies must now disclose individual compensation for registered directors when it exceeds 500 million won.
The first disclosures under these rules were made earlier this year for compensation paid in 2013.
These disclosures reveal that the top paid executive received about 30 billion won in 2013. At least six directors earned more than 10 billion.
The media and the public paid great attention to the disclosures ― the first time in Korea that compensation for individual executives has been disclosed on a large scale.
Companies and directors were criticized for earning so much.
But this was not the only reason for criticism. In some cases, directors no longer working with the company were still paid as full-time directors. Others received high levels of compensation while their company was losing money.
Some commentators wondered if Korean companies were using appropriate executive evaluation and compensation guidelines.
In addition to criticism of pay levels, how the payments were disclosed was also questioned.
For example, the new regulations require companies to disclose the criteria and methods used to decide executive pay. However, many companies have disclosed only vague information to shareholders.
Common explanations included sentences such as: "Compensation is based on director compensation rules." "Compensation is decided by the Board of Directors."
"Compensation is based on internal rules."
Also, although it is widely believed that founding family members make the most important company decisions, many family members stepped down from as registered directors before the disclosure rules took effect.
This has been interpreted as an effort to dodge the disclosure rules rather than an actual abdication of their management rights and influence.
More transparent and expanded executive compensation disclosure is a global trend, and Korea is now among the countries with such rules.
It is difficult to imagine the trend reversing, so it is time for Korean companies to learn from the experiences of companies in other countries and think about how Korean companies should adapt.
Despite the apparent fears of some Korean companies, the experience of other countries show that high ― even extraordinary ― levels of pay can be acceptable to shareholders when strong company performance justifies this.
Therefore, to avoid shareholder criticism, companies should design pay packages that are clearly aligned with performance.
Companies should also assess the objectivity of how compensation levels are decided, and should consider using an independent compensation committee.
In particular, Korean companies can learn from Japan's experience with pay disclosure.
The first year Japanese companies had to disclose compensation for executives, observers paid attention mostly to compensation only. But in later years the alignment of compensation philosophy with corporate strategy and the relationship between pay levels and company performance were the areas of focus.
This shows that Korean companies need to place executive compensation in a wider context, including company performance and strategy.
Globally, individual executive compensation disclosure requirements continue to become more detailed and rigorous, and Korea is not likely to be an exception.
Thus, even though pay disclosure can be uncomfortable for many Korean companies who are not used to it, they can learn from companies in other countries and adopt compensation practices that can improve performance and help minimize public disapproval.
While it is difficult to anticipate immediate changes to the disclosure rules, more comprehensive disclosure is likely to be required, and companies will need to keep paying attention.
The writer is a director of talent and rewards at Towers Watson Korea
 |
| Toby Kim |
The first disclosures under these rules were made earlier this year for compensation paid in 2013.
These disclosures reveal that the top paid executive received about 30 billion won in 2013. At least six directors earned more than 10 billion.
The media and the public paid great attention to the disclosures ― the first time in Korea that compensation for individual executives has been disclosed on a large scale.
Companies and directors were criticized for earning so much.
But this was not the only reason for criticism. In some cases, directors no longer working with the company were still paid as full-time directors. Others received high levels of compensation while their company was losing money.
Some commentators wondered if Korean companies were using appropriate executive evaluation and compensation guidelines.
In addition to criticism of pay levels, how the payments were disclosed was also questioned.
For example, the new regulations require companies to disclose the criteria and methods used to decide executive pay. However, many companies have disclosed only vague information to shareholders.
Common explanations included sentences such as: "Compensation is based on director compensation rules." "Compensation is decided by the Board of Directors."
"Compensation is based on internal rules."
Also, although it is widely believed that founding family members make the most important company decisions, many family members stepped down from as registered directors before the disclosure rules took effect.
This has been interpreted as an effort to dodge the disclosure rules rather than an actual abdication of their management rights and influence.
More transparent and expanded executive compensation disclosure is a global trend, and Korea is now among the countries with such rules.
It is difficult to imagine the trend reversing, so it is time for Korean companies to learn from the experiences of companies in other countries and think about how Korean companies should adapt.
Despite the apparent fears of some Korean companies, the experience of other countries show that high ― even extraordinary ― levels of pay can be acceptable to shareholders when strong company performance justifies this.
Therefore, to avoid shareholder criticism, companies should design pay packages that are clearly aligned with performance.
Companies should also assess the objectivity of how compensation levels are decided, and should consider using an independent compensation committee.
In particular, Korean companies can learn from Japan's experience with pay disclosure.
The first year Japanese companies had to disclose compensation for executives, observers paid attention mostly to compensation only. But in later years the alignment of compensation philosophy with corporate strategy and the relationship between pay levels and company performance were the areas of focus.
This shows that Korean companies need to place executive compensation in a wider context, including company performance and strategy.
Globally, individual executive compensation disclosure requirements continue to become more detailed and rigorous, and Korea is not likely to be an exception.
Thus, even though pay disclosure can be uncomfortable for many Korean companies who are not used to it, they can learn from companies in other countries and adopt compensation practices that can improve performance and help minimize public disapproval.
While it is difficult to anticipate immediate changes to the disclosure rules, more comprehensive disclosure is likely to be required, and companies will need to keep paying attention.
The writer is a director of talent and rewards at Towers Watson Korea
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