Executive Pay Drop in South Korea: A 'Visual Effect' of New Disclosure Rules

South Korea's financial authorities aimed to enhance transparency by requiring companies to disclose executive compensation alongside shareholder returns. The goal was to link executive pay more closely to shareholder value, addressing a criticism that misaligned incentives contribute to the 'Korea discount.' However, the initial rollout of these new rules has led to a misleading picture for investors.

Meritz Financial Group, for example, reported a 93% drop in average director compensation, from 43 billion won to 3.1 billion won. This dramatic decrease, however, was largely due to the inclusion of 81.4 billion won in stock option gains for CEO Kim Yong-bum in the previous year's calculation. When these one-time gains are excluded, executive pay has actually seen a steady increase.

An analysis of the top 100 listed companies by market capitalization revealed a similar trend. While the average director compensation decreased by 20.8% from 2.058 billion won to 1.629 billion won, this figure was skewed by large stock option exercises. Excluding these, the average compensation for 99 companies remained relatively stable, at 1.627 billion won in 2024 and 1.614 billion won in the previous year.

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Investors need to be able to easily compare how executive compensation is linked to stock prices.

Companies like Kakao Bank and Kakao Pay also experienced distorted compensation trends due to stock option exercises, which were granted years prior for past performance but appear as recent compensation adjustments. This lack of clarity forces investors to cross-reference multiple disclosures to understand the true relationship between performance and pay. In contrast, the U.S. bases its reporting on the stock option grant date, not the exercise date.

Further complicating the picture are companies that strategically time performance-based bonuses. For instance, Celltrion's average director pay halved, but this was due to the deferral of bonus payouts to the current year. One-time payments like severance packages also distort the figures. Securities firms have expressed disappointment, arguing that the new disclosure, while intended to provide more information, fails to offer meaningful insights. The Financial Supervisory Service acknowledges these issues and plans to review improvements, noting that current disclosures follow tax law standards, which differ from international practices.

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There are aspects that differ from the U.S. as current executive compensation disclosures follow the standards of the Income Tax Act. We will continuously review whether there are any areas for improvement in the second half of the year.