The Financial Supervisory Service (FSS) has determined that the annual payout of approximately 1 trillion won in performance bonuses by financial institutions poses issues and will reorganize the performance compensation system. The FSS currently sees the existing system as potentially jeopardizing the management of individual financial institutions. The FSS stated it will guide financial institutions to establish a performance compensation system aimed at enhancing long-term soundness.
On the 15th, Lee Se-hoon, chief deputy commissioner of the FSS, held a briefing at the FSS headquarters in Yeouido, Seoul, to announce these details. The FSS inspected the performance compensation systems applicable to executives and financial investment personnel of 153 financial institutions. According to the FSS, in 2023, the financial institutions surveyed paid a total of 1.0645 trillion won in performance bonuses. The average performance bonus per employee was recorded at 139 million won. By rank, the average performance bonus amount for CEOs was 380 million won, for other executives 200 million won, and for financial investment personnel 90 million won.
The FSS pointed out that the overall performance compensation system is designed in a way that could undermine the soundness of individual financial institutions. Some financial institutions assigned high scores to profitability in performance evaluations while giving low scores to soundness and consumer protection achievements. A significant 81.2% of savings banks and 66.6% of insurance companies do not have long-term performance evaluation indicators, indicating a prevalence of a short-term performance-oriented evaluation system.
Additionally, the FSS evaluated that the procedures and implementation rates related to adjustments and recoveries of performance bonuses within individual financial institutions are insufficient. According to the Enforcement Decree of the Financial Regulatory Governance Act and related regulations, financial institutions must defer at least 40% of performance bonuses for a minimum of three years. This is necessary because performance bonuses must be adjusted or recovered when losses occur related to employees' responsibilities. The amount adjusted for performance bonuses during the last year was 576.5 billion won, while the recovery amount remained at 90 million won.
The failure of numerous financial institutions to meet the minimum standards for the deferral of performance compensation was also noted. Seven out of ten financial institutions set the deferral period to three years. The FSS believes that such behaviors among financial institutions do not align with the intent of securing soundness. The chief deputy commissioner stated, “While financial institutions tend to adhere to formal norms, they do not seem to follow the intent of the system.”
Going forward, the FSS plans to guide the restructuring of performance compensation systems for individual financial institutions. In particular, for tasks that may heavily focus on short-term results, such as real estate project financing (PF), the FSS intends to examine whether the period for deferring performance compensation aligns with the investment realization period. The chief deputy commissioner emphasized, “If management continues to establish a performance compensation system despite recognizing distorted factors, they could be held accountable when losses occur due to the performance compensation later on.”