[Thomas Klassen] Learning from the labor dispute at SC First Bank

The bitter seven week strike at SC First Bank, the longest in the Korean banking industry, reveals deep divisions between workers and management. More importantly, it exposes critical choices that workers, employers and government must make in the next few years.

The planned introduction of a performance-based pay system ignited the labor dispute. The union views the proposed new wage scheme as unacceptable given that Korean culture and workplace norms stress teamwork and hierarchy. The company argues that the existing seniority-based wage system is costly and that a merit pay scheme would better allow it to remain competitive.

The strike makes plain the deep fault lines, like those in an earthquake prone region, that exist in Korean workplaces. Strikes, like earthquakes, are not the best way to reach a healthy and stable equilibrium.

Technology is creating new industries, transforming old ones (like banking).

Moreover, Korea is changing with more women in the labor force, and a rapidly aging population. These, and other trends, mean that new workplace policies are needed. The new policies require neither that the old ways be jettisoned altogether or that they be remain untouched.

It is entirely possible to combine elements of performance-based with seniority-based pay. In fact many employers in Korea ― and around the world ― have been able to marry the best elements of both. In most sectors, the performance-based elements are small, representing only two to four percent of annual pay and act as a symbolic means to recognize exceptional performance.

Seniority-based pay in Korea is not, as often believed, a centuries old tradition. Rather, it derives from the Japanese who introduced it in factories during the occupation, and also from the military model of employment used during Korea’s rapid industrialization of the 1970s and 1980s. There is no reason to believe that making adjustments to seniority-based pay will negatively impact the success of firms.

Reforming how workers are paid is but the first step. The next step is to adapt retirement policies to the 21st century. Seniority-based wages, and the guarantee of annual pay increases, are valuable to workers because retirement comes so quickly. Most workers in the financial services industry are involuntarily retired in the early and mid 50s. Not surprisingly, they are not keen on any reform that could impact pay.

Employers argue that older workers are more expensive and want to see them go sooner rather than later.

SC First Bank would have done much better in its negotiations had it sought to link how workers are paid with how workers are retired. By focussing solely on merit pay, the bank missed taking a holistic approach that recognizes that pay is linked to other aspects of a worker’s life.

A reasonable compromise is for workers to agree to aspects of performance-based pay, and for employers to stop forcing productive workers to retire at early ages. In addition, it is also reasonable for government to legislate a higher mandatory retirement age, such as age 60, and to set a legal minimum retirement age.

It is has recently become unacceptable and illegal to discriminate against women because of their gender, and also to discriminate in hiring based on age. Discrimination against older workers in retirement decisions is as injurious and unfair. Constructing harmonious workplaces cannot be done when some ― those reaching a particular age ― are treated unjustly.

Having workers stay with their employers longer will actually create more jobs for younger people. The OECD and other experts continue to point out that it is a myth that retiring older workers creates employment positions for younger workers. In fact, it does the opposite.

Retiring highly paid and productive older workers reduces the overall output of the economy and fails to create jobs for younger workers. Forcing a highly productive bank employee to retire at 52, when she or he still has over 30 years to live and bills to pay, is cruel and, in an international perspective, peculiar.

Adapting seniority-based wages to new workplace conditions provides an opportunity to look afresh at another long-held belief in Korea. Namely, that older workers are less productive than younger ones.

The scientific evidence is clear: older workers are not less or more productive than younger workers. The only exception is for very physically demanding jobs, of which there are fewer and fewer. Productivity is not related to age but rather to motivation, training, technology, health, experience and many other workplace factors.

Since older workers are not less productive there is no reason for them be retired at an arbitrary age. Of course, employers should be wary of the productivity levels of older workers. However, employers should be as troubled by poor or declining productivity of younger workers who, after all, will remain with the company for many years.

Korea has the opportunity to create harmonious and high performing workplaces that are in keeping with its unique traditions and history. This can only be done when employers, unions and government recognize that stubbornly clinging to existing ideas and policies is counterproductive.

Adapting to new workplace, demographic and economic conditions requires compromises and looking to the future and past. Workers will need to accept some elements of performance-based pay, employers will have to retain workers for more years, and government must provide more legal protection for older workers.

By Thomas Klassen

Thomas Klassen is a professor of political science at York University in Toronto, Canada. He is in Seoul during the summer of 2011 as a visiting researcher at the Korea Labor Institute. The opinions in this article are his own. His email is tklassen@yorku.ca. ― Ed.