The Lotte Group has decided to expand its 'job-based HR (human resource management)' system, which pays differentiated wages based on the duties and expertise of individuals, throughout its subsidiaries, leading to growing interest in the so-called 'job-based pay system.' This system has only been adopted by some public institutions and a few private companies in South Korea. Major corporations found it difficult to implement due to employee resistance. In contrast, it has become common in the United States, the United Kingdom, and Germany, and Japan, with its strong seniority culture, is also expanding its adoption.

According to the Korea Administrative Organization on the 23rd, job-based pay is defined as a wage system that determines the value of a job based on the complexity and responsibility of the role, linking that value to compensation. The aim is to assess the relative value of the job based on the principle of 'equal pay for equal work' and to provide wage levels that match this value, avoiding wage determinations based on personal characteristics such as tenure and age.

Graphic=Jeong Seo-hee

◇ South Korean corporations mostly use a mix of seniority-based and annual salary systems

Domestic corporations in South Korea have historically adopted a wage system centered around seniority, but recently a mixed form of seniority and annual salary systems has become widespread. Seniority-based systems automatically increase wages according to years of service, while annual salary systems determine compensation based on performance, job duties, and market value. Many companies operate with a base salary according to the seniority method, while performance bonuses are handled through the annual salary method.

In contrast, the job-based pay system varies wages according to job importance even within the same company. To implement this, a job analysis process that collects and analyzes information about job content, circumstances, and requirements is essential. The Lotte Group has also been classifying the difficulty and importance of jobs within its subsidiaries into five grades, from level 1 to 5, since last year.

The 'job-based HR' personnel system that the Lotte Group is promoting aims to enhance work productivity by differentiating compensation based on job value and expertise. It embodies the characteristics of the job-based pay system in that compensation varies by job. So far, Lotte has been evaluated as having one of the most conservative personnel systems among major domestic companies. The timing of introducing the annual salary system was in 2018, which was relatively late compared to other major companies.

The Lotte Group's decision to overhaul its personnel and wage systems is driven by the growing sense of crisis within the group due to sluggish performance in its core businesses. Lotte Chemical, which served as the group's cash cow, reported a deficit of 1.8256 trillion won last year and is expected to incur a deficit in the hundreds of billions of won range this year.

Lotte Shopping, representing the retail sector, also experienced a decline in sales and operating profit last year. Lotte Construction is reviewing the sale of its headquarters building in Seocho District as part of measures to secure liquidity. Lotte Corporation and its major subsidiaries are enacting severe personnel reforms, conducting voluntary retirements, and asking executives to refund 10% to 30% of their salaries.

Illustration=ChatGPT DALL·E 3

◇ Job-based pay systems are common overseas… Japan is also adopting them

Unlike South Korea, job-based pay systems are widely practiced overseas. In the UK, the 'Equal Pay Act' was passed in 1970, establishing the principle of 'equal pay for equal work.' According to the Korea Administrative Organization, a survey of 98 companies in the UK conducted in 2017 found that 77.6% reported having formal job evaluation systems.

In the United States, various organizations such as corporations, public institutions, hospitals, and schools utilize job-based pay systems. Google applies segmented criteria based on teams or regions for the same jobs, and IBM clearly sets salary, bonus, and promotion conditions according to job descriptions and grade-based standards.

Japan, which is evaluated as similar to South Korea regarding its emphasis on seniority, is also strengthening its job-centered compensation system recently. Japan's largest telecommunications group, NNT, declared the introduction of a job-based pay system in September 2021, categorizing job grades into six levels based on importance. Subsequently, it transitioned the existing monthly salary, composed of base pay, role, and job allowances, into a job-based salary. The automotive manufacturer Toyota also abolished regular promotions based on seniority for management positions at the level of section chief or higher in 2019, and expanded this to include production workers in 2021.

However, there are indications that in Korea, where Confucian culture predominates, ensuring sufficient agreement from the staff is essential for implementing a job-based pay system. For instance, DHL, a global logistics company headquartered in Germany, entered Korea in 1977 and introduced a job-based pay system to its Korean branch in 2007. At that time, it was the last among the countries where DHL entered, as much time was spent persuading employees.

The 1-ton electric delivery truck of DHL Korea is running on the road. /Courtesy of DHL Korea

Beginning in 2003, DHL traveled across the country for two years, explaining the necessity of the system's adoption to employees and seeking their consent. To secure objectivity, it also sought external consultants' help and formed a project team centered around opinion leaders internally, going through a steady persuasion process. Gradually widening employee consensus, DHL successfully fully implemented the job-based pay system in 2007.

◇ Persuading employees is key… Lotte says it will hold meetings and other procedures

Lotte is reviewing plans to adopt the personnel system, focusing on major subsidiaries such as Lotte Department Store and LOTTE Wellfood, before expanding it to all subsidiaries in the future. However, sufficient consultation with members remains a challenge. An employee from a Lotte subsidiary remarked, "We haven't even received official notice that the personnel system reform will be broadly applied to the entire group; we've only learned about it through rumors," adding, "Wage system reform is an important issue for workers, yet there are internal complaints about it being conducted somewhat unilaterally."

Professor Yoon Dong-yeol from the Department of Business Administration at Konkuk University stated in a report published in 2022, "To adopt a job-based pay system, it is necessary to be able to compare the workload of various jobs with similar jobs in the labor market, but it is true that finding those criteria is challenging in Korea," adding, "To successfully operate the job-based pay system, accurate wage information research and data establishment must increase information transparency, and efforts need to be made by labor-management stakeholders to set and agree on criteria."

Lotte is preparing various procedures, including meetings for employees of subsidiaries where the new personnel system is set to be introduced. A representative from LOTTE Corporation stated, "Subsidiaries planning to introduce the new personnel system are preparing various matters centered around the HR team. We also plan to hold a meeting to explain the changing personnel system to employees in line with future schedules."