Are chaebol owners overpaid? Critics call for disclosure of detailed guidelines on executive compensation

Updated : 2014-04-13 18:39

Are chaebol owners overpaid?

Critics call for disclosure of detailed guidelines on executive compensation

According to a recent executive salary disclosure, SK Group Chairman Chey Tae-won (top left) received the largest paycheck, amounting to 30.1 billion won ($28.8 million). Following were Hyundai Motor Chairman Chung Mong-koo (top right) and Hanwha Group Chairman Kim Seung-youn (bottom left). Samsung Electronics Chairman Lee Kun-hee (bottom right) was excluded from the list because the regulation on disclosure exempts non-board members
By Kim Bo-eun
How much does Samsung Electronics Chairman Lee Kun-hee get paid annually? Nobody knows, at least for the time being, despite Korea’s first-ever move to disclose corporate executives’ pay.
Executive-level pay at corporations was unveiled on March 31, following financial authorities’ amendments in regulations last year that now require listed companies to reveal salary details of board members whose annual incomes exceed 500 million won ($480,000).
Topping the list was Chey Tae-won, the chairman of Korea’s third-largest conglomerate, SK Group, who earned a total of 30.1 billion won ($28.8 million) from four of the group’s affiliates. Next were Hyundai Motor Chairman Chung Mong-koo, who earned 14 billion won, and Hanwha Group Chairman Kim Seung-youn, who earned 13.1 billion won. Samsung Electronics’ Lee was excluded from the list because he is not a board member. The amended regulation exempts non-board members from disclosure.
The paycheck disclosure of business tycoons and executives is viewed by experts and the public as a positive development, as it aims to improve the transparency of conglomerates’ payment systems and protect shareholders’ rights. It is a step up from the previous regulation that required companies to disclose only the total of all executives’ annual incomes. However, critical loopholes in the amended regulation remain, civic activists say.

Overcompensation
Even setting aside the exemption of non-board members from salary disclosure, the disclosure of board members’ salary alone has generated much controversy.
Chey was criticized not only for his astronomical pay but more for the fact that he had been in jail for embezzlement for the past year and therefore, had not at all been involved in management.
Similarly, Hanwha’s Kim received the third-largest paycheck last year, even though he had been absent from his position for the past year due to legal run-ins for embezzlement and breach of trust.
In a seeming attempt to soothe public criticism, Hanwha Group said earlier this month Kim returned 20 billion won of his 33.1 billion income for last year to account for his absence and will not be receiving any income this year. Similarly, SK Group said Chey will not be receiving any pay this year.
Meanwhile, several other tycoons — Kumho Petrochemical Chairman Park Chan-koo, Hanjin Shipping Chairwoman Choi Eun-young and GS Group Chairman Huh Chang-soo — received fat paychecks even while their companies or affiliates recorded deficits.
When the regulation governing these matters was amended last May, corporations were initially required to disclose their payment guidelines together with executives’ paychecks. However, with significant resistance from businesses, the government decided to make the disclosure of compensation guidelines voluntary. This has enabled company executives to get away with large paychecks despite position vacancies and company deficits, a civic activist said.
“SK’s Chey and Hanwha’s Kim made no contribution but still got enormous compensation. This is because the conglomerates arbitrarily determine how much their executives will get paid,” said Lee Ki-ung, manager of the economic policy team at the Citizens’ Coalition for Economic Justice (CCEJ).
Exemptions
The greatest problem with the amended regulation, however, is that it requires only board members to reveal their incomes. Other executives who are not board members avoid disclosure even if their incomes exceed the limit of 500 million won. Consequently, a number of tycoons stepped down from their board member posts last year, including Shinsegae Group Vice Chairman Chung Yong-jin. SK’s Chey and Hanwha’s Kim stepped down from board positions earlier this year.
“This year’s paycheck disclosure mostly shows the incomes of employed CEOs. Key conglomerate owners, on the other hand, avoided disclosure by stepping down from board posts,” said Lee.
“The problem is that while owners such as Samsung Electronics’ Lee and Shinsegae’s Chung are no longer board members, they still have leverage over management,” he said.
Lee Ji-soo, a lawyer at the Center for Good Corporate Governance (CGCG), said that the regulation needs to be amended further so that it becomes mandatory for non-board member executives to reveal their incomes as well.
“Essentially, the owners are the ones who decide how much employed CEOs get, while they continue to receive exorbitantly large paychecks — they need to be subject to disclosure,” he said.
While Financial Services Commission Chairman Shin Je-yoon commented last week that this would not happen anytime soon, the debate continues. The proposal also faces fierce opposition from businesses, which oppose the idea of disclosing executive-level income in the first place.
“Disclosing the total of all executives’ incomes was enough. We don’t see why individual executives’ incomes need to be revealed,” said an official at the corporate policy team of The Federation of Korean Industries.
“If businesses perform well, executives can be entitled to large paychecks. However, the disclosure of their incomes has stirred negative public sentiment, which could potentially cause problems in efficient management,” he said.
The official said disclosure of executives’ incomes can hinder maintaining an efficient performance assessment and payment system, make it difficult to scout capable managers as well as create a source of conflict between labor and management.
Detailed guidelines
Much of the public debate is on how much executives are being paid and how much they should be paid. According tochaebul.com, an information provider on large businesses, the average pay of 290 executives at 93 major listed companies of Korea’s top 10 chaebol was around 1 billion won last year — 14 times of that of the average employee. However, a look at the CEO-to-worker compensation ratio at multinational companies outside Korea shows that Korea’s executives receive considerably less. According a paper published by the Economic Policy Institute in the U.S. last year, CEOs at the top 350 firms earned 273 times (options realized) more than the average worker in 2012. The ideal CEO-to-worker payment ratio remains disputed, but according to American management consultant Peter Drucker, who is often cited in the debate, the pay ratio should be 20 to 1.
However, even civic groups and organizations say in a capitalist society, the absolute amount of pay should be determined by performance. They also remain cautious about the idea of setting a limit to how much executives should be paid.
“Honestly, is wouldn’t be easy to determine what the appropriate amount of compensation would be for executives. This would differ according to company as well as sector. If this were to be done, all these paychecks would first need to be made public, and then opinions would have to be collected. We are not yet at a stage to consider a paycheck limit,” said Lee at the CCEJ.
Experts seem to agree that the debate should shift toward whether payment measurement methods are appropriate.
“Currently, there are no disclosed guidelines for how bonuses and performance-related pay are determined. However, it should be made mandatory for companies to disclose the criteria they use that link executive payment to performance,” said Lee at the CGCG.