Are our company’s performance bonuses also wages? What are the criteria for judging performance bonuses suggested by the Supreme Court?

The long-held belief that ‘performance pay is not wages’ has been broken. Last January, the Supreme Court overturned the original ruling that denied the wage status of Target Incentive (TAI) in a lawsuit claiming severance pay filed by 15 people, including former Samsung Electronics employee A, and sent the case back to the Suwon High Court. Companies that have previously considered performance bonuses as 'discretionary company bonuses' are in a situation where they have to reexamine their severance pay calculation method from the beginning due to this ruling.

The key criterion of the ruling was 'whether it can be assessed that workers' provision of work can control the achievement of the goal that is the standard for payment.' The target incentive recognized as wages was a fixed amount of money where the base bonus amount, which was the basis for calculation, was set according to a formula (120% of the monthly standard wage) determined in advance based on the standard salary for each worker, and the payment scale was confirmed to some extent in advance, and the payment amount was determined according to the degree of implementation of tasks for each business unit (30%) and the level of financial performance achieved (70%).

Considering the structure of the target incentive, the Supreme Court interpreted it as wages, believing that the target incentive is closer to the ex post settlement of labor performance rather than the ex post distribution of management performance. Although the sales indicator (30%) of financial performance achievement is influenced by non-labor factors, sales in a specialized, specialized and advanced organization such as Samsung Electronics are results that are achieved through the intensive provision of labor by workers in the relevant area, and it is believed that achievement of sales goals can be controlled through labor provision.

On the other hand, judgments about performance incentives (OPI) were different. The performance incentive is calculated as the base amount of 20% of each business division's EVA (profit after tax operating profit minus capital costs, etc.) multiplied by the payment rate calculated based on each worker's rank or performance. However, the amount of EVA, which is the basis for calculating performance incentives, fluctuates significantly depending on exchange rates, raw material prices, capital costs, etc. In other words, the occurrence and scale of EVA are the result of a combination of other factors, such as the size of equity or debt capital, the size of expenditures, market conditions, and management judgment, in addition to workers' provision of labor. It was believed that other factors that are not closely related to workers' provision of labor and are difficult for workers to control have a greater impact. Based on this, the Supreme Court interpreted that performance incentives are not wages, considering that they are not paid in return for work, but rather are a distribution or sharing of profits resulting from management performance.

Although this Supreme Court ruling does not present a new legal principle regarding the judgment of wages, it is meaningful in that it presents more specific standards for judging whether a company's performance-based pay system constitutes wages. This seems to be an opportunity to go beyond simply judging the compensation system within Samsung Electronics and to reexamine the performance bonus system of our company as a whole.

Until now, many companies have understood performance bonuses as compensation for management performance rather than wages. However, in the future, it has become clearer that performance bonuses can be legally evaluated as ‘wage’ depending on the payment standards and calculation structure. For workers, this means the possibility of expanding the scope of calculation of various statutory allowances such as severance pay and overtime and night allowances, and for companies, it means that there is an increased need to reexamine compensation system design and labor cost management strategies more precisely.

In particular, if the payment structure of performance bonuses is closely linked to the provision of work and the scale of payment is predictable in advance, the likelihood of it being evaluated as wages may increase regardless of the name. Conversely, in cases where the nature of distribution of management results or profit sharing is strong, there is room for denial of the nature of wages. Ultimately, it is highly likely that the core of future disputes will be the actual nature and payment structure of performance bonuses.

In order to prepare for these changes, companies need to check the actual legal nature of their performance bonus system. It is important to comprehensively review the payment standards, calculation method, and certainty of payment for performance bonuses to ensure consistency with related regulations such as employment rules, compensation regulations, and employment contracts. At the same time, workers also need to accurately understand the structure and legal meaning of the performance-based pay system and be clearly aware of how their wages are structured and what their rights are.

In the end, this ruling can be said to be an example that once again confirms that the substance and structure of the system, rather than the name 'performance pay' itself, are the standards for legal judgment. In the future, it is highly likely that a company's compensation system will go beyond the realm of simple personnel and management strategies and become the subject of labor law risk management. Contemplating how to design and operate a performance compensation system has now become an important task for both companies and workers.
 

Reporter Lee Dong-oh (canon35@mt.co.kr)

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