Essential HR Strategies for Securing Competitive Compensation

[HR Insight December 2019 Issue]

CEO Jeon Myung-hwan

As the business environment continues to deteriorate, concerns are growing over ways to secure compensation competitiveness, which is a key factor in maintaining corporate competitiveness. To strengthen competitive compensation, HR should examine various feasible measures by considering both cost-efficiency and the securing and retention of personnel, and above all, from a total compensation perspective, reflect employees’ needs and develop diverse compensation strategies that encompass the characteristics of each generation

It must be reviewed."

In March 2018, the so-called U.S.-China trade war began when U.S. President Donald Trump signed an executive order that could impose high tariffs on Chinese goods. The trade war between the two countries, which began with tariffs, has since expanded to include technical issues such as the United States’ sanctions on Huawei and China’s hints at restricting rare earth exports, and although an atmosphere seems to be creating a truce recently, the instability of the global economy caused by this conflict still persists. In addition, due to the Supreme Court’s rulings on compensation for forced labor under Japanese colonial rule, the decision to forcibly recover assets of Nippon Steel (formerly Shin Nippon Steel and Copper), and the Korea-Japan dispute over Fukushima seafood imports, diplomatic and political conflicts between the two countries have intensified, and in July 2019, Japan’s Ministry of Economy, Trade and Industry announced export restrictions on materials used in semiconductors and display devices to South Korea, escalating the economic dispute based on the Korea-Japan trade dispute

The enemy uncertainty is also intensifying. This economic uncertainty, combined with the stagnation in global economic growth rates that has persisted for nearly a decade, is further worsening the business environment for our companies. The IMF expects the global economic growth rate this year to be 3.4%, and 3.5% in 2020, which is the lowest level since 2009. 

Meanwhile, under the Moon Jae In administration, many companies are facing relative difficulties in improving labor cost efficiency and securing workforce flexibility due to the rapid increase in the minimum wage, the conversion of non-regular workers to regular positions, and next year’s application of reduced working hours to small and medium-sized enterprises with 50 to fewer than 300 employees. Changes in the external market and policy environment such as these are creating a highly unfavorable environment for ensuring operational efficiency, and companies are facing a situation where they must seriously consider various HR strategies for growth, maintenance, and survival. Above all, since compensation is the most essential HR function in maintaining corporate competitiveness, the need for a company to secure wage competitiveness cannot be overstated. Next, we will examine what methods can be used to maintain compensation competitiveness as one way to overcome the external environmental challenges our companies are facing, and what key checkpoints HR personnel should review to achieve this.

Corporate Approaches to Competitive Compensation and HR Checkpoints

Among the various means for securing a company’s competitiveness, strategies for securing competitiveness in terms of compensation can be approached by dividing them into two main perspectives. One is an approach from the perspective of securing cost-effectiveness, and the other is an approach from the perspective of securing and retaining personnel. The former can be understood as a method of cost reduction through efficient control of labor costs in the context of corporate operational strategy, such as outsourcing or offshoring certain organizations or business units, and the transfer of production, services, and jobs overseas to reduce expenses. In the latter case, it is understood as an approach that helps companies maintain their competitiveness by creating a favorable environment for securing talented personnel and enabling existing employees to focus on delivering results rather than seeking job opportunities.

Review of Compensation Competitiveness from the Perspective of Securing Cost-Effectiveness

To reduce costs and secure flexibility in workforce management, the strategy of outsourcing part of non-core tasks has, at some point, become a routine practice. In addition, many mid-sized and large companies are frequently relocating their production bases overseas, where labor costs are lower. Such changes are highly prevalent in tasks whose nature makes routine easy, whose inputs and outputs can be transmitted electrically with ease, in which interaction with other employees is minimal, and in which regional knowledge, such as special social or cultural factors, is not required.

 In Apple’s case, it outsources a significant portion of iPhone and iPad assembly to China’s Foxconn, enjoying cost savings of billions of dollars annually. According to scenario analysis reports published by the U.S. media, if iPhones and iPads were assembled in the United States in 2011, there would be an estimated labor cost gap of about $65 per unit between the U.S. and China, which would translate into a decrease in operating profit of about $8 billion (24%). For that reason, companies cannot easily give up the opportunity to generate profit based on securing wage competitiveness through outsourcing or offshoring.

 It also showed that, assuming a computer programmer with 3 to 5 years of experience earns a total compensation of $56 per hour at IBM, while in China it remains at around $12.5 per hour, transferring the job to countries such as China, India, or Brazil could save $168 million annually, according to internal assessments. However, despite these benefits, there remains a risk for HR personnel in terms of maintaining quality and customer satisfaction, which must be sacrificed in order to reduce costs. Therefore, there is a key checkpoint that must be carefully examined when adopting this approach. First, we must not overlook the fact that countries with low labor costs also have low productivity. Therefore, companies should be able to verify, based on diverse data, evidence that the savings in labor costs may not be offset by low productivity. In addition, to overcome problems that may arise from geographical and cultural differences, a system and framework must be established that allow for close management of the efforts corporate members make and the results they achieve in overcoming such issues. Furthermore, changes in customer satisfaction regarding the quality of the produced goods or the services provided must be taken into account. Even if a company achieves cost savings through low labor costs, if the quality of the products or services it provides declines and customers are lost, it will ultimately be difficult for the company to achieve its intended goals.

[HR Insight December 2019 Issue]

CEO Jeon Myung-hwan

As the business environment continues to deteriorate, concerns are growing over ways to secure compensation competitiveness, which is a key factor in maintaining corporate competitiveness. To strengthen competitive compensation, HR should examine various feasible measures by considering both cost-efficiency and the securing and retention of personnel, and above all, from a total compensation perspective, reflect employees’ needs and develop diverse compensation strategies that encompass the characteristics of each generation

It must be reviewed."

In March 2018, the so-called U.S.-China trade war began when U.S. President Donald Trump signed an executive order that could impose high tariffs on Chinese goods. The trade war between the two countries, which began with tariffs, has since expanded to include technical issues such as the United States’ sanctions on Huawei and China’s hints at restricting rare earth exports, and although an atmosphere seems to be creating a truce recently, the instability of the global economy caused by this conflict still persists. In addition, due to the Supreme Court’s rulings on compensation for forced labor under Japanese colonial rule, the decision to forcibly recover assets of Nippon Steel (formerly Shin Nippon Steel and Copper), and the Korea-Japan dispute over Fukushima seafood imports, diplomatic and political conflicts between the two countries have intensified, and in July 2019, Japan’s Ministry of Economy, Trade and Industry announced export restrictions on materials used in semiconductors and display devices to South Korea, escalating the economic dispute based on the Korea-Japan trade dispute

The enemy uncertainty is also intensifying. This economic uncertainty, combined with the stagnation in global economic growth rates that has persisted for nearly a decade, is further worsening the business environment for our companies. The IMF expects the global economic growth rate this year to be 3.4%, and 3.5% in 2020, which is the lowest level since 2009. 

Meanwhile, under the Moon Jae In administration, many companies are facing relative difficulties in improving labor cost efficiency and securing workforce flexibility due to the rapid increase in the minimum wage, the conversion of non-regular workers to regular positions, and next year’s application of reduced working hours to small and medium-sized enterprises with 50 to fewer than 300 employees. Changes in the external market and policy environment such as these are creating a highly unfavorable environment for ensuring operational efficiency, and companies are facing a situation where they must seriously consider various HR strategies for growth, maintenance, and survival. Above all, since compensation is the most essential HR function in maintaining corporate competitiveness, the need for a company to secure wage competitiveness cannot be overstated. Next, we will examine what methods can be used to maintain compensation competitiveness as one way to overcome the external environmental challenges our companies are facing, and what key checkpoints HR personnel should review to achieve this.

Corporate Approaches to Competitive Compensation and HR Checkpoints

Among the various means for securing a company’s competitiveness, strategies for securing competitiveness in terms of compensation can be approached by dividing them into two main perspectives. One is an approach from the perspective of securing cost-effectiveness, and the other is an approach from the perspective of securing and retaining personnel. The former can be understood as a method of cost reduction through efficient control of labor costs in the context of corporate operational strategy, such as outsourcing or offshoring certain organizations or business units, and the transfer of production, services, and jobs overseas to reduce expenses. In the latter case, it is understood as an approach that helps companies maintain their competitiveness by creating a favorable environment for securing talented personnel and enabling existing employees to focus on delivering results rather than seeking job opportunities.

Review of Compensation Competitiveness from the Perspective of Securing Cost-Effectiveness

To reduce costs and secure flexibility in workforce management, the strategy of outsourcing part of non-core tasks has, at some point, become a routine practice. In addition, many mid-sized and large companies are frequently relocating their production bases overseas, where labor costs are lower. Such changes are highly prevalent in tasks whose nature makes routine easy, whose inputs and outputs can be transmitted electrically with ease, in which interaction with other employees is minimal, and in which regional knowledge, such as special social or cultural factors, is not required.

 In Apple’s case, it outsources a significant portion of iPhone and iPad assembly to China’s Foxconn, enjoying cost savings of billions of dollars annually. According to scenario analysis reports published by the U.S. media, if iPhones and iPads were assembled in the United States in 2011, there would be an estimated labor cost gap of about $65 per unit between the U.S. and China, which would translate into a decrease in operating profit of about $8 billion (24%). For that reason, companies cannot easily give up the opportunity to generate profit based on securing wage competitiveness through outsourcing or offshoring.

 It also showed that, assuming a computer programmer with 3 to 5 years of experience earns a total compensation of $56 per hour at IBM, while in China it remains at around $12.5 per hour, transferring the job to countries such as China, India, or Brazil could save $168 million annually, according to internal assessments. However, despite these benefits, there remains a risk for HR personnel in terms of maintaining quality and customer satisfaction, which must be sacrificed in order to reduce costs. Therefore, there is a key checkpoint that must be carefully examined when adopting this approach. First, we must not overlook the fact that countries with low labor costs also have low productivity. Therefore, companies should be able to verify, based on diverse data, evidence that the savings in labor costs may not be offset by low productivity. In addition, to overcome problems that may arise from geographical and cultural differences, a system and framework must be established that allow for close management of the efforts corporate members make and the results they achieve in overcoming such issues. Furthermore, changes in customer satisfaction regarding the quality of the produced goods or the services provided must be taken into account. Even if a company achieves cost savings through low labor costs, if the quality of the products or services it provides declines and customers are lost, it will ultimately be difficult for the company to achieve its intended goals.

<그림 1> 총 보상Total Reward 관점의 보상개념 확장

(1) 보상수준에서의 검토사항

일반적으로 대부분의 기업들은 보상의 수준이 높을수록 우수한 인재를 채용하기 용이하고, 구성원들의 직무몰입도나 성과창출에 대한 기여도가 높을 것이라고 기대한다. 그러나 임금이나 복리후생의 수준을 높게 유지하는 기업들이 반드시 생산성이 높고, 이직률이 낮게 나타난다는 근거를 명확히 제시하기는 어렵다. 이는 기업 내에 이미 다양한 세대의 구성원이 존재할 뿐만 아니라, 인간은 금전에 대한 욕구 외에도 성장기회나 타인들과의 우호적이고 긍정적인 관계형성, 일과 삶의 균형 확보 등 다양한 형태의 욕구를 가지고 있기 때문이다. 이런 점에 있어서도 보상의 개념을 임금, 복리후생 등 금전적 범위를 넘어 <그림 1>과 같은 총보상의 관점으로 확대해야 할 필요성이 제기되는 것이다. 그러나 절대적인 임금의 수준이 유인의 용이성, 결원율 및 훈련시간 감소, 낮은 이직률과 결근율에 영향을 미친다는 연구결과도 있는 만큼 기업 외부에 대한 경쟁력 유지를 위해서는 반드시 보상수준에 대한 기업의 접근전략을 검토해야만 한다. 이를 통상 보상의 ‘외부경쟁력’ 확보를 위한 기준으로 이해할 수 있다. 전통적인 보상수준의 전략을 수립은 흔히 경쟁적 선행정책, 상응정책, 후행정책 등으로 구분되며, 이는 여전히 보상수준 책정에 있어서 유효한 접근방법이라 판단된다.    

 따라서 HR담당자는 보상수준의 전략을 수립함에 있어 유사 산업 내 시장의 경쟁강도, 인력 공급의 수준, 인재들의 유출입 경로, 경쟁 기업들의 임금수준 등을 고려해 보아야 한다. 우리 기업이 존재하는 시장의 경쟁강도가 매우 높고, 인력의 공급이 부족한 상황이라면 보상수준의 선행정책 Lead Pay-Level Policy, 시장의 평균 임금수준보다 공격적으로 더 높은 임금을 책정해 우수 인재를 확보하고자 하는 전략이 불가피 할 것이다. 그러나 시장 내에 서 독점적 지위를 유지하고, 충분한 인력이 공급될 수 있는 환경이라면 상응정책Pay with Competition-Match, 시장 경쟁자들의 평균적인 임금수준에 해당 기업의 보상수준을 일치시키는 정책만으로도 보상경쟁력 유지가 가능하다고 볼 수 있다. 다만 조직의 기업 운영전략 자체가 나이키나 리복과 같이 가장 낮은 수준의 총보상으로 상품 및 서비스를 제공해 경쟁하는 경우라면(나이키는 신발류의 99%를 중국, 베트남, 인도네시아, 태국 등 노동비용이 저렴한 국가에 아웃소싱해 생산하고 있음) 보상의 후행정책Lag Pay-Level Policy을 고려해야만 할 것이다. 그러나 이러한 보상정책들 중 어느 하나를 선택했더라도 총 보상 관점에서 비금전적 요소들의 중요성을 간과할 수 없으므로 보상의 수준만이 아닌 보상믹스와 관련된 다양한 검토가 반드시 이루어져야 한다.

(2) 보상믹스에서의 검토사항

 보상의 수준이 아무리 높더라도 보상배분 절차에 있어서의 공정성이나 임금결정 요인의 합리성이 충분히 조직 구성원들에게 인식되지 않으면 보상의 효과는 부정적일 수 밖에 없고, 따라서 해당 기업의 보상경쟁력은 떨어지게 될 것이다. 따라서 해당 기업의 전략에 부합하는 가장 최적의 보상믹스를 검토할 필요가 있으며, 이를 다시 직군별, 세대별, 역할별로 세분화해 구성원들의 보상에 대한니즈에 맞도록 구성하는 접근도 요구된다. 그래야만 보상이라는 수단을 통한 효율성 및 생산성의 확보가 가능할 것이며, 궁극적으로 보상경쟁력을 갖춘 기업으로 자리매김 할 수 있을 것이다.

<그림 2> 메릴린치의 계층별 보상믹스 변화

<그림 2>의 메릴린치 사례에서는 직급 또는 역할에 따라 보상믹스에 현격한 차이를 두고 있음을 확인할 수 있다. 경영진의 경우 기본급여가 10% 미만인 반면 주식 인센티브가 20% 이상을 차지하고, 그 외에는 연 단위의 현금 인센티브가 부여된다. 이에 비해 중간관리자나 전문가 그룹은 50% 수준의 기본급여가, 신입 및 하위등급 직무수행자에게는 80%의 기본급여와 20%의 현금 인센티브가 지급되며, 주식관련 보상은 없다. 이와 같은 보상믹스는 성과주의에 핵심적 가치를 두고 있는 기업의 전형적인 보상믹스 사례라고 할 수 있겠다.

한편 딜로이트가 2009년 1,400명의 CFO를 대상으로 수행한 설문조사 결과 우수인재 확보를 위해 가장 중요한 것이 금전적 보상이고, 그 다음이 유연근무제가 될것이라는 응답이 있었다. 이는 대부분의 구성원들이 일과 삶의 균형에 대한 욕구가 높아졌음을 의미한다. 또한 SHRM(Society for Human Resource Management)의 연구결과에 따르면 Y세대나 밀레니얼 세대의 경우 삶의 질이나 일의 가치, 회사 생활에 못지않게 개인생활의 중요성에 무게를 두고 있다. 따라서 세대별 특성을 반영한 다양한 금전적, 비금전적 보상믹스를 반드시 고려해야만 한다.

 무엇보다 아무리 높은 수준의 보상과 다양하고 합리적인 보상믹스를 제공하고 있더라도 이에 대한 구성원들의인식이 충분하지 않으면 그 효과를 보장받을 수 없다. 따라서 기업의 보상제도에 대한 구성원과의 커뮤니케이션 역시 매우 중요한 HR부서의 활동 중 하나가 되어야 한다. 어떤 기업은 개인 성과급이나 집단 인센티브 등을 포함해 높은 수준의 임금을 지급하고 있음에도 불구하고, 경쟁사와 대비해 기본 연봉이 낮다는 인식이 팽배해져 우수 인재들이 경쟁상로 유출되는 등의 어려움을 겪기도 한다.

<그림 3> 경쟁사 대비 보상믹스 계기판

이러한 문제가 발생되지 않도록 하기 위해 미국의 모 기업은 <그림 3>과 같이 경쟁사 대비 보상믹스 계기판을 작성해 구성원들과 보상의 주요 내용을 공유하기도 한다. 최근 몇 년간 우리 기업들은 대외적 변수에 의한 비용 상승 압박으로 많은 어려움을 겪고 있다. 이를 극복하기위한 노력의 하나로 보상경쟁력의 강화가 더욱 요구되는 시점이다. 보상경쟁력의 강화는 비용효율성의 관점과 인력의 확보·유지라는 양 측면에서 가능한 다양한 방안을 검토해야 하며, 무엇보다 총보상 관점에서 구성원들의 니즈를 반영하고, 세대별 특징을 아우를 수 있는 다양한 보상전략이 검토되어야 한다. 이를 통해 어려운 시장환경에서 HR담당자들의 보상경쟁력 강화를 위한 노력이 경영환경 변화의 극복에 중요한 역할을 할 수 있길 기대해 본다.

컨설팅 문의(전명환 대표): cplajmh@eoncg.com

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