Salary Reform in South Korea and Japan

Pan Suk KimUnderwood Distinguished Professor

Yonsei University, South Koreapankim@gmail.com

Contents

1. Introduction and Background

2. Korean System

3. Korean Performance-Related Pay

4. Japanese System

5. American System

6. Implications

1. Introduction & Background

Related Terms

Compensation

All the extrinsic rewards that employees receive in exchange for their work

C=base wage/salary + incentives + benefits

PayRefers only to the actual dollars employees receive in change for their work

WageHourly pay (see minimum wage)

SalaryWeekly, monthly, or annual pay that employees receive for their work

Incentives

Rewards offered in addition to the base wage of salary & usually directly related to performance

Benefits

Rewards employees receive as a result of their employment & position with the organization

5

Government Workforce in the Executive Branch

as of December 31, 2010

• Total Employees in the Executive Branch:

955,890

• Number of Central Government Employees: 612,672 (64%) including General Service(95,794), Teachers(350,383), law enforcement(135,204), and Postal Service(31,291)

(Women: 46.1% in the national government; Grade 5 or above: 10.8%)

• Number of Local Government Employees:

343,218 (36%)

• Total Population: 49 million (2010)

• Ratio of Population/Gov’t Employees = 51 : 1

Vertical Classification

Grade 6

Grade 7

Grade 8

Grade 9

Grade 5

Grade 4

Grade 3

Grade 2

Grade 1

Supporting

Officer

Deputy Director

Division Director

Director General

(DG)

Assistant Minister

SCS

* Open competitive exams: three written entrance exams (3 levels--Grades 9, 7, and 5)

Grading of the Korean Civil Service

Political Appointees (Ministers and

Deputy Ministers)

Career Civil Servants

SCS

Components of Employee Compensation

Salary Incentives Benefits

Monthly

Annual pay

Overtime pay

Bonus

Performance–related Pay

Paid vacation

Health insurance

Life insurance

Retirement

pension, etc.

Ministry of Public Administration and Security (MOPAS)

2. Korean System

History of Remuneration System Development

1948~1960s

• Enacted the State Public Officials Act(1949)

• Introduced the Senior Civil Service (SCS) system(Jul. 2006)

• 5 Grades → 9 Grades(1981)

• Introduced the performance-related pay system(1999)

1970s ~1990s

2000s• Simplified allowances: 32 → 30(Jan. 2011)

• Enacted the Presidential Decree on Public Officials Remuneration(1949)

• Introduced the annual salary system(1999)

• Enacted the Presidential Decree on Public Officials Allowance(1962)

Principles of Remuneration Determination

※ Article 46(1)-(3) (Principles of Determination on Remuneration)

of the State Public Officials Act

The complexity of duties & the degree of responsibility By grade

Price levels & standard living cost of general public

Appropriate balance with private enterprise wages

Balance between public officials in career & non-career service

Livelihood wage

ExternalBalance

Internal Balance

Proper

remuneration

Salary Structure

•Monthly Salary = Base Pay + Allowances (30 kinds)

•On average: Base Pay (65%): Allowances (35%)

•12 different salary schedules: general, legal, technical services; law enforcement, research, development; police, firefighters; teachers, professors; military Service; and labor

•30 different allowances: family allowance, special locality allowance, special task allowance, overtime allowance, bonus, etc.

Fringe Benefits

• General benefits– Benefits for dependents

– Retirement insurance

– Unemployment insurance

– Medical insurance

– Disability benefits

• Pay for not worked– Sick leave, holidays, vacation, military leave,

etc.

• Employee services– Tuition reimbursement, wellness programs,

etc.

Korea: Base Pay of the General Service(monthly base pay; Korean Won in 2011)

G-1 G-2 G-3 G-4 G-5 G-6 G-7 G-8 G-9Grade

Step

1 3,065,400 2,759,700 2,489,700 2,133,800 1,907,000 1,573,200 1,411,700 1,258,700 1,119,400

2 3,172,800 2,862,100 2,581,900 2,221,000 1,984,100 1,646,300 1,476,100 1,319,800 1,176,800

3 3,283,100 2,965,600 2,676,600 2,309,500 2,063,900 1,721,800 1,544,200 1,384,300 1,237,600

4 3,395,700 3,070,600 2,772,300 2,400,200 2,147,000 1,799,000 1,616,000 1,449,900 1,302,000

5 3,511,100 3,176,600 2,869,300 2,492,100 2,232,400 1,878,400 1,690,100 1,518,500 1,367,100

6 3,627,900 3,283,000 2,967,500 2,584,800 2,319,400 1,960,100 1,766,100 1,588,500 1,433,700

7 3,746,400 3,390,700 3,066,700 2,678,400 2,407,900 2,041,800 1,842,800 1,659,000 1,497,300

8 3,866,100 3,498,400 3,166,100 2,772,600 2,497,500 2,124,000 1,919,700 1,726,500 1,558,700

9 3,987,100 3,606,600 3,266,400 2,866,800 2,587,200 2,206,400 1,992,900 1,791,000 1,617,500

10 4,109,000 3,715,000 3,366,700 2,961,100 2,677,700 2,283,700 2,062,800 1,852,000 1,674,000

11 4,230,700 3,823,700 3,467,000 3,056,200 2,761,900 2,357,000 2,128,700 1,911,000 1,727,900

12 4,356,400 3,936,100 3,571,200 3,145,700 2,843,400 2,429,100 2,193,500 1,968,800 1,781,500

13 4,482,900 4,049,300 3,668,000 3,229,500 2,920,800 2,497,000 2,255,000 2,024,300 1,832,800

14 4,609,800 4,151,600 3,757,700 3,307,600 2,992,900 2,561,100 2,313,900 2,077,200 1,882,700

15 4,720,500 4,246,200 3,840,400 3,381,100 3,061,000 2,622,700 2,369,900 2,128,100 1,930,400

16 4,818,900 4,332,800 3,917,700 3,450,400 3,125,200 2,680,400 2,423,200 2,177,200 1,976,700

17 4,906,100 4,412,500 3,989,300 3,514,700 3,185,400 2,735,400 2,474,300 2,223,100 2,021,700

18 4,983,900 4,485,300 4,056,000 3,575,100 3,242,500 2,787,600 2,523,000 2,267,600 2,063,800

19 5,053,400 4,552,500 4,117,800 3,631,200 3,296,000 2,836,900 2,568,800 2,310,300 2,105,000

20 5,115,900 4,614,000 4,175,300 3,683,700 3,346,200 2,883,500 2,612,600 2,351,000 2,144,400

Salary Structure: Base Pay & Allowances

Preferential allowance, attendance allowance,

performance bonus

Family allowance, children school support allowance,

childcare leave allowance, house allowance

Special area, hazard work, special job duty

Allowances for overtime work, night shift,

holiday duty, management work, etc.

Base compensation paid according to pay schedule & service years

Meal, job position support, traditional holidays,

compensation on unused leaves

Base pay

Allowance(26 types)

Actual Expenses,

etc. (4 types)

Bonus(3 types)

Family support(4 types)

Special allowance(15 types)

Overtime work, etc.(4 types)

* Average ratio of salary(base pay) in total payment: 65%

Additional compensation paid according to working & living conditions

Annual Salary Table for Higher-level Officials with a performance appraisal system (2011)

Grade Max imum Min imum

Grade-1 89,271,000 59,507,000

Grade-2 82,505,000 54,975.000

Grade-3 76,700,000 51,524.000

Grade-4 70,166,000 40,781,000

Politicians and Political Appointees: Annual Salary System Based on Fixed Pay (2011)

CategoryAnnual Salary

Category Annual Salary

President 179,094 Minister-level 102,097

Prime Minister 138,841

Minister of Legislation,Minister of Veterans

AffairsMinister of Trade

NegotiationPresident’s Chief of Staff

100,624

Chairman of the Board of

Audit and Inspection

105,040 Deputy Minister-level 99,153

(Unit : KRW 1,000, Annual Amount)

Procedure of Remuneration Adjustment

Annual survey of private sector wages

Establishment of a remuneration improvement plan (MOPAS)

Budget plan approval (National Assembly )

Revision of related laws

(MOPAS)

• Survey target: Office workers’ wages of private enterprises

with 100 employees or more

•Source: “Survey on Labor Conditions by Employment Type”

(Ministry of Employment and Labor)

• Survey cycle: once a year

• Reviewed by the public-private remuneration deliberative committee

-Committee members: Representatives of private businesses, academia, public officials’ organizations, etc.

- Functions: Providing reviews & advice on appropriate increaserate of civil service wages

• Considering private enterprises wage hike rate, inflation,financial conditions, etc.

• Inter-ministerial consultations between MOPAS, MOSF, etc.• Reported to the president & referred to vice ministerial meeting,cabinet meeting

Inter-ministerial

consultations & decision of

draft government proposal

• Revision of the Presidential decrees on public officials remuneration & allowances

e.g. Change of salary tables, the amount and rate of allowances

Government’s ability to pay for personnel expense (Ceiling)

Cost of Living(Lower Limit)

Available Rangeof Salary Level

Social Balance(labor-management relations, collective bargaining power,role of government)

Social Balance(Salary level in

related industriesand institutions)

Determining Factors of Salary Level

YearIncrease in Base Pay

Ratio to Private Salaries

Rate of Increase in

Wages in the Private Sector

Rate of Increase in Consumer

Price

EconomicGrowth

1996 9.0 (5) 4.9 7.0

1997 5.7 (5) 4.4 4.7

1998 -4.1 (0) 7.5 -6.9

1999 -0.9 (0) 0.8 9.5

2000 9.7 (3) 88.4 (91.1) 9.9 2.3 8.8

2001 7.9 (5.5) 93.1 (95.3) 6.4 4.1 4.0

2002 7.8 (8.5) 94.8 (96.8) 7.6 2.8 7.2

2003 6.5 (3) 95.5 (97.3) 8.4 3.5 2.8

2004 3.9 (3) 95.9 (97.7) 6.7 3.6 4.6

2005 1.3 (0) 93.1 (94.3) 7.2 2.8 4.0

2006 2.0 (1.8) 91.8 (Same) 6.1 2.2 5.2

2007 2.5 (1.6) 89.7 (Same) 4.1 2.5 5.1

2008 2.5 (1.8) 89.0 (Same) 5.6 4.7 2.3

2009 0.0 (0.0) 89.2 -0.5 2.8 0.2

2010 0.0 (0.0) 84.4 4.9 2.9 6.1

2011 5.1 (6.5)

Public Servants’ Salary Index:

Ratio to Private Salaries

12.1

7.5

6.9

6.7 5.94.6

9.5

5.4

7.1

8.2

2.3

4.1

2.8

3.55%

10%

15%

3.6

2.8

2.2

2.5

4.7

2.9

90%

100%

2.8

-0.45

’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10

89.7

91.8

94.3

97.7

97.396.8

95.3

91.1

89.0 89.2

84.4

80%

Private wage increase rate

Inflation Ratio of public officials’ salaryto private salary

※ Criteria : Companies with over 100 full-time employees

• Public officials’ wage increase rate: 2.5%(2007~’08) → 0%(2009~’10) → 5.1%(2011)

• The ratio of public officials’ salaries to private sector salaries: 84.4%(2010)

3. Korean Performance-Related Pay

Performance Agreement for Senior Officials

Typical performance appraisal system (based on check list or rating scale) could be based on the following major areas:

(1) job performance in terms of timeliness, completeness, job difficulties, etc.

(2) job-fulfilling abilities or core competencies in terms of planning, communication, cooperation, innovation, citizen-orientation, etc.

(3) values, attitudes, etc.

Performance Appraisal for Middle- and Lower-Level Officials

Appraisal Grade

Excell-ent

(Grade S)

Outstan-ding

(Grade A)

Normal

(Grade B)

Unsatis-factory

(Grade C)

Payment Scope

Top 20%

30% 40%Bottom

10%

Performance Pay Rate

15% 10% 6% 0%

Champion Mediocre

PRP Scheme for Senior Officials

PRP Scheme for Middle- and Lower-Level Officials

Appraisal

Grade

Excellent

(Grade S)

Outstan-

ding

(Grade A)

Normal

(Grade B)

Unsatis-

factory

(Grade C)

Payment

Scope

Top

20%

30%

(20%-

50%)

40%

(50%-

90%)

Bottom

10%

Performance

Bonus Rate

230%(of standard

base pay)

160% 90% 0%

Appraisal

Measurability

Participation Rewards

High

Low

Meaningful

Not Meaningful

Unfair Fair

Low High

Type A

Type D

Type B Type I

Type C

Strategies to Utilize PRP Schemes: Develop a Model Case

4. Japanese System

National Personnel Agency (NPA)

The Remuneration Bureau is in charge of the duties on the Recommendations and establishes standards to determine salary and allowances. The bureau also studies employment and remuneration measures for aged public employees.

Basic Principles of the Japanese Remuneration System

Remunerations of national public employees is required to meet the general conditions of society.

The NPA makes the remuneration recommendations in principle to adjust the remuneration level of national public employees to that of the private sector employees (Principle of following the Private Sector).

Remunerations of national public employees are determined basically in accordance with the types of their duties and their responsibilities.There are 17 salary schedules divided in accordance with the types of employee jobs (Administrative Service, Public Security Service, Medical Service, etc.); one of these schedules is applied to each national public employee.Each salary schedule has several grades divided in accordance with the degrees of difficulty and responsibility of duties (Officer, Unit Chief, Division Director , etc.)

In the remunerations system of national public employees, pay grade increases and pay step increases shall be determined based on actual work performance and their abilities, and diligence allowances (bonus shall also be paid in accordance with their work performance.

Japanese Salary Structure

Japan: Salary Table –Administrative Service

Japan’s Remuneration Recommendation by NPA

The NPA Remuneration Recommendation as a compensatory measure for the denial of labor rights has a function to ensure appropriate remuneration of national public employees that is adapted to general social conditions.

The Recommendation is made on the basis of balancing the remuneration level of national public employees with the remuneration level of employees of private enterprises (the principle of following the private sector).

The NPA is endeavoring to appropriately carry out its responsibilities for decisions regarding remunerations and other working conditions of public employees by making recommendations to the Diet and the Cabinet regarding basic mattes to be designated by laws and regulations and establishing or abolishing NPA Rules based on the statutory delegation of authority regarding concrete standards.

Japan: NPA Remuneration Recommendation in 2010

Both monthly salaries and bonuses shall be reduced. Average annual remuneration shall be reduced by 94,000 yen (1.5%).

(Principally, monthly salaries for employees in their late fifties shall be reduced.)

① Monthly remuneration shall be reduced in order to eliminate the negative public-private differential (the public sector remuneration exceeds that of the private sector by 0.19%).

－There will be a reduction of salary and managerial allowance by a fixed rate for employees older than 55 years of age, and reduction of salary schedules.

② The End-of term and Diligence Allowances (“bonus”) shall be reduced by 0.2 months of salary.

Japan: Remuneration Survey

Japan: Remuneration Recommendation

Japan: Base Pay and Allowances

Base Pay (83%)

Base Pay (82%)

Allowances (17%)

Allowances (18%)

Japanese Government Struggling on Public Wage Cuts

The Yomiuri Shimbun (Daily Newspaper on October 6, 2011)

The government has been under pressure to make a difficult decision over

salary cuts for national public employees for fiscal 2011.

The National Personnel Authority said salaries should be cut an average of

0.23 percent in its annual recommendation last Friday.

However, the government has already submitted a bill to cut total personnel

costs 7.8 percent through fiscal 2013 to the Diet to squeeze out revenues for

reconstruction efforts following the March 11 Great East Japan Earthquake.

While the National Personnel Authority insisted its recommendation be carried

out, the Democratic Party of Japan and the Japanese Trade Union

Confederation (Rengo) support the salary cut bill for public employees.

There is sharp focus on how Prime Minister Yoshihiko Noda will exercise his

leadership in dealing with the two proposals.

5. American System

Salary Table of the American Federal Government in 2011:General Schedule (GS) 1-15

American SES and Executive Schedule in 2011

Structure of the SES Pay System

Minimum Maximum

Agencies with a Certified SES Performance Appraisal System

119554 179700

Executive Schedule Level I 199700

Executive Schedule Level II 179700

Executive Schedule Level III 165300

Executive Schedule Level IV 155500

Executive Schedule Level V 145700

Annual Salary of Politicians in the US

• US President = USD 400,000 per year(+ 50,000 expense allowance; before 2001, it was 200,000 since 1969)

The president earns a $400,000 annual salary, along with a $50,000 annual expense account, a $100,000 nontaxable travel account and $19,000 for entertainment

• Vice President = $230,700

•Chief Justice, US Supreme Court = $223,500

•Speaker of the House = $223,500

•Senator/Representative = $174,000

(Majority/Minority Leaders: $193,400)

•President’s Chief of Staff = $172,200

6. Implications and Lessons Learned

4.1 Possible Increase in Public Officials’ Remuneration

Policy goal

Public service wage needs to maintain appropriate balance with private enterprise wages.

* Private enterprise wage > civil service wage * Ratio to private salaries in 2010: 84.4%

Challenges

In 2011, the Korean government plans to achieve 5 percent GDP growth and

maintain inflation rates under 3 percent.

It is needed to raise civil service wage over private wage increase rate.

Higher wages of public officials may pressure rising inflation.

Future Plans

To raise civil service remunerations in the level of the minimum inflation

without declining real income

• Running of the remuneration review committee participated by academia,

economic organization, etc., and consultation with related agencies

People have higher expectations on the government’s efficiency and

civil servants’ competitiveness.

To strengthen performance-related incentives

• Expansion of the performance-related bonus scale, and increase in incentive gap

Legal Foundations? The role of the civil service act and related decrees?

Organizational Foundations? The role of the central personnelagency?

Resource Allocations? The role of the central finance agencyand its resource allocation for salary adjustment?

System Capacity? New system design and the role of propercompensation systems?

Salary reform tools? The utility of “remuneration survey”used in China, Japan and Korea?

Political and public support for salary reform?

Leadership commitment and policy marketing?

Lessons Learned