Samsung Electronics' retirement benefit costs rose by about 700 billion won ($496 million) in a single year after the Supreme Court ruled in January that the company's target achievement incentive, known as TAI, must be included in the average wage used to calculate severance pay.
The business community has raised concerns that unpredictable judicial rulings are compounding companies' cost burdens and deepening management uncertainty. With major conglomerate unions increasingly demanding that bonuses be set at a fixed percentage of operating profit, industry groups are calling on the government to establish clear standards and guidelines before legal confusion spreads further.
According to Samsung Electronics' semiannual report released Thursday, the company's defined-benefit retirement costs on a consolidated basis reached 1.39 trillion won in the first half of this year, up 697.6 billion won — or 100.4 percent — from 694.7 billion won in the same period last year.
The roughly 700 billion won increase exceeds the approximately 500 billion won Samsung Electronics paid last year through Harman to acquire Sound United, and is nearly double the approximately 267.5 billion won it spent to secure a controlling stake in Rainbow Robotics.
Most of the cost increase stemmed from past service costs. Samsung Electronics' past service costs swung from negative 100 million won in the first half of last year to 715.1 billion won in the first half of this year, a jump of 715.2 billion won.
Past service costs refer to the additional projected retirement benefit obligations that arise when the basis for calculating severance pay changes, covering the period employees have already worked.
Samsung Electronics said in the report that "past service costs include the impact on the defined-benefit plan resulting from the ruling that changed the scope of average wages."
Business circles have expressed concern that a series of court rulings and union demands are piling up labor costs in ways companies cannot anticipate, widening management uncertainty.
"Right now, semiconductor sales are booming and operating profit exceeds 100 trillion won, so absorbing 700 billion won is manageable," one industry official said. "But if a ruling like this had come down two or three years ago during the downturn, it would have been very hard to survive."
The official added that the industry was troubled by a steady stream of unpredictable challenges — not only the expanded definition of average wages, but also the growing union demand that bonuses be pegged to a set percentage of operating profit.
Until recently, the Supreme Court had consistently held that performance bonuses do not count as average wages.
But in January, the court reversed lower court rulings and found that TAI — a bonus Samsung Electronics pays twice a year — constitutes wages paid in exchange for work and must therefore be included in severance pay calculations.
The court found that TAI has the character of a fixed wage that employees can reasonably expect as compensation for their labor, and that organizational performance metrics such as sales are causally linked to workers' efforts.
By contrast, the court ruled that the performance incentive known as OPI (formerly PS) — paid once a year and funded partly from each division's economic value added, or EVA — does not constitute wages.
The court reasoned that EVA is heavily influenced by factors outside workers' control, including market conditions, cost of capital and management decisions.
At the time of the ruling, however, industry groups criticized the distinction between the two incentives as unclear. The Korea Enterprises Federation said it was "regrettable that the court overlooked the fact that the sales component among TAI evaluation criteria is, like OPI, subject to external factors beyond workers' control."
After Samsung Electronics became the first case in which part of a performance bonus was recognized as severance-eligible, a wave of lawsuits followed at other companies, including LG Display and SK Hynix. SK Hynix in particular operates performance pay schemes — including a productivity incentive and an excess profit-sharing bonus — similar to those at Samsung Electronics.
However, the Supreme Court ruled in that case that the bonuses could not be included in severance pay calculations because they were not specified in the company's work rules.
The irony, industry officials note, is that spelling out bonuses in work rules had been considered a worker-friendly measure — yet the court used that very fact to rule against the company, leaving management with little choice but to take a defensive stance in bonus negotiations.
"From a company's perspective, we included the bonus in the work rules out of goodwill," one industry official said. "It is questionable whether it is fair to impose a heavier retirement benefit burden on companies that did the right thing." The official added that companies would likely respond by keeping bonuses discretionary rather than fixed, to avoid having them recognized as wages.
Another industry official warned that labor disputes are increasingly being resolved by judicial rulings rather than through labor-management agreements and voluntary choices. "A single precedent can have sweeping effects on the entire compensation structure and labor cost base of companies across the board," the official said, adding that rulings shift depending on the inclinations of individual judges, making uncertainty even greater. The official stressed that clear guidelines are needed on what percentage of operating profit should count toward bonuses.
go@heraldcorp.com
