According to industry sources on the 8th, in a recent employee vote on the personnel system overhaul, 55.6% of all employees participated, and 71.9% of those who voted were in favor. However, the final approval rate based on the total workforce was only 40%, failing to meet the majority approval requirement necessary to amend the employment rules.
The proposed reforms involved shifting from the existing cash-based performance-based pay system to a system of company stock grants, and restructuring the evaluation process from twice-yearly assessments to a single annual performance and competency evaluation. Although the company sought to expand compensation tied to corporate value and simplify the evaluation system, it failed to secure consensus among its employees.
Despite the Intent to ‘Expand Compensation’… Concerns Over Severance Pay and Stock Price Volatility Hindered Progress
Many in the industry acknowledge that the intent behind the reform is understandable. Given that IT service companies have a high proportion of labor costs, making it difficult to expand compensation solely through cash performance bonuses, reviewing a long-term compensation system utilizing company stock was seen as a natural step.
However, the decision to push forward with changes to performance bonuses and severance pay—issues employees are most sensitive about—without sufficient explanation or safeguards is cited as the decisive misstep.
Since the Supreme Court ruled last January that SamsungElectronics’ Target Achievement Incentive (TAI) should be recognized as wages and included in the calculation of severance pay, concerns have spread among employees of Samsung affiliates about how changes to the performance bonus system might affect their severance pay.
During this process, the reasons for opposition differed between senior and junior employees. Long-tenured employees were concerned that changes to the performance-based bonus system could lead to reduced severance pay, while younger employees reportedly felt that receiving company stock—whose value fluctuates with stock prices—instead of cash reduced the predictability of their compensation.
Some in the industry have pointed out that, given the organization’s characteristic of having many long-tenured employees, the company should have first proposed improvements to the retirement pension system or measures to protect long-tenured employees before overhauling the performance-based bonus system.
One industry official stated, “While the company’s intention was likely to expand compensation, senior employees were more concerned about losses in severance pay, while junior employees were more concerned about the uncertainty of stock-based compensation,” adding, “The rejection was caused by pushing forward with sensitive issues like performance-based bonuses and severance pay without building sufficient consensus.”
Limitations of Employee Representation Revealed… The Era of Majority Unions Has Begun
Criticism has also been raised regarding the implementation process. Although Samsung SDS extended the voting period and sought input through procedures such as having the existing employee representative body, the Future Empathy Council, participate in the System Improvement Task Force (TF), it is assessed that the existing communication methods revealed their limitations when dealing with highly contentious issues like compensation and severance pay.
It is unlikely that this conflict will spread throughout the IT services industry as a whole. Analysts note that the case of SamsungSDS—which involved the SamsungElectronics TAI ruling, the conversion of compensation to company stock, and the structure of its long-serving workforce—is highly unique, as performance-based bonuses at other IT service companies are often managed at relatively predictable levels, similar to fixed salaries.
Lee Jun-hee, CEO of Samsung SDS, sent an apology message to employees following the rejection of the reform plan, stating, “We failed to fully consider the feelings of our employees during the reform process,” and added, “I sincerely apologize for the confusion and concern this has caused.”
“Official Negotiations with the Union Going Forward”… Changes to the Personnel System Inevitable
The most significant change resulting from this situation is in labor-management relations.
The Samsung SDS branch of the Samsung Group Inter-Company Labor Union—formed to address a lack of communication with employees during the restructuring of the personnel and compensation systems—announced that it had secured majority union status with approximately 5,800 members just one day after its launch. Following the rejection of the restructuring plan, the union stated that membership had reached about 6,000 and emphasized that it would handle official negotiations with the company going forward.
The union stated, “Please leave future official negotiations and communication—including those regarding the rejected proposed changes to the employment rules—to the labor union.”
Until now, Samsung SDS had operated its personnel and compensation systems primarily through employee representative bodies, but with the emergence of a majority union, it is increasingly likely that official consultations with the union will become a key procedure for any future changes to employment rules and reforms to the personnel and compensation systems.
This case appears to go beyond a mere failure to reform the performance-based pay system; it is expected to serve as a turning point for Samsung SDS as it shifts the framework of its labor-management relations from a “direct communication-centered” approach to a “union-negotiation-centered” one.
