South Korea Considers French Model for Capping Performance Bonuses

South Korea's Presidential Office is exploring mechanisms for distributing exceptional profits, drawing inspiration from France's legal framework for profit-sharing, according to Kim Yong-beom, Senior Secretary to the President for Economic Affairs. The initiative comes in response to unprecedentedly large performance-based bonuses at major South Korean companies, such as Samsung Electronics and SK Hynix, where these bonuses have at times exceeded regular wages.

Kim highlighted the unique situation at SK Hynix, which reported a 70% operating profit margin, leading to complex labor negotiations over performance-based compensation. "We need to establish rules," Kim stated, "starting with discussions on whether bonuses larger than regular wages become a subject of dispute between labor and management."

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We need to establish rules, starting with discussions on whether bonuses larger than regular wages become a subject of dispute between labor and management.

As a reference point, Kim pointed to France's "legal profit-sharing system" (Participation), which has been codified in labor law since 1967. This system mandates the calculation and distribution of surplus profits, considering labor's contribution. Under French law, companies with 50 or more employees must implement this system. The formula typically identifies profits exceeding a 5% return on equity as distributable surplus, which is then shared between labor and capital based on their respective contributions.

Kim noted that individual payouts under the French system are capped, currently around 60 million won (36,000 euros) per person, not exceeding 75% of the social security contribution base. Furthermore, these profit distributions are often linked to employee savings schemes, providing tax benefits. While employees can opt for immediate cash payment, this incurs income tax. Otherwise, the funds are automatically deposited into retirement savings or similar accounts, typically becoming tax-free after five years. This system functions more as a deferred compensation mechanism than a simple bonus, offering tax advantages to both employers and employees.

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In France, they have established regulations in their labor law regarding profit distribution formulas, with a cap of approximately 70 million won per person, not exceeding the level of social insurance.