Considerations for Improving the Wage System in Response to Changes in the Rank System

[HR Insight February 2019 Issue]

CEO Jeon Myung-hwan

"Recently, many companies have been seen reorganizing their rank systems. The restructuring of the rank system is accompanied simultaneously by the goal of achieving a horizontal organizational culture as well as wage efficiency. Therefore, when reforming the rank system, the wage system also needs to be reassessed. Let’s take a look at the wage issues that arise when the rank system is reorganized and what HR should consider."

 Our country's average economic growth rate over the past few years has remained in the mid-to-high 2% range, and it has already fallen below the global economic growth rate. Of course, it is somewhat higher than the average of advanced countries, but in the case of the IMF, it has already lowered its growth forecast for this year from 2.9% to 2.6%, and it is also difficult to find any optimistic messages in the forecasts of most domestic research institutions, the government, and the Bank of Korea. As such, the likelihood remains high that difficulties in running businesses will continue to exist in the new year.  Since 2000, this low-growth economic trend has exposed throughout the HR domain the problems of Korea’s multi-tiered rank system based on seniority, which Korean companies had maintained during their growth period.

                                                            <Figure 1> Problems of Seniority-Based Personnel Systems

In other words, based on a people-centered workforce management system and the long-term operation of seniority-based systems, various problems have arisen, including a rigid organizational culture, promotion bottlenecks, rank assignments unrelated to job value or capability, decreased labor cost efficiency due to the high-ranking nature of personnel, excessively fixed wage ratios, and evaluation systems that fail to properly reflect performance or capability (see Figure 1), which have ultimately emerged as a major reason why companies have failed to secure future competitiveness. Of course, since the early 2000s, advanced companies have 

We have already recognized the need for change and have prepared measures to respond to future environments by revising the HR strategy itself. However, a considerable number of companies in the public sector as well as in traditional industries still face such problems, and in some cases have yet to develop adequate solutions.

Directions for Improving the Rank System

To address such problems, it is necessary to shift from a “people-centered” HR approach to a “work-centered” one in response to changes in the business environment, thereby securing a more rational and flexible workforce management system. In particular, the recent growing interest in job-centered personnel systems is understood as part of this shift in the direction of personnel management. Of course, in countries like ours where human attributes have been the foundation for the development of corporate systems and organizational culture, it may be worth considering the establishment of an HR management system based on competencies or roles that encompasses both the characteristics of the job and human attributes, rather than the sudden, job-attribute-centered changes seen in the West.

 Above all, to address various problems stemming from issues in the human resource structure, many companies have recently been simplifying their rank systems and improving their titles and promotion systems in an effort to build a more horizontal and flexible culture. A brief summary of this change in the rank system paradigm can be organized as shown in <Figure 2>. Reducing the rank system does not merely mean cutting down the number of rank levels. Because, as the hierarchy level is reduced, it inevitably accompanies changes in the various systems that are linked to it. Therefore, the title (position) system linked to rank, the compensation system, the minimum length of service required for each rank, and the promotion criteria must all be simultaneously improved so that they can maintain consistency with the new rank system. In particular, the compensation system, which has an important impact on the lives of individual workers, must be carefully reviewed for improvement in line with the restructuring of the rank system.

                                                                <Figure 2> Changes in the Paradigm of the Rank System

Changes in the Compensation System Following the Improvement of the Rank System

Generally, when simplifying the rank system, it is designed in a way that defines new roles according to rank levels and distinguishes titles and roles, thereby ensuring operational flexibility in the organization. At this time, the compensation system must also be improved according to the changed rank system, but the points to note differ depending on the form of wages. In the case of the annual salary system, there is a certain degree of basic flexibility, so there is no major difficulty in making improvements, but in the case of the step-based pay system, there are several points that need to be kept in mind.

                                                              <Characteristics of the Workforce Management System According to Attributes, Figure 3

Changes in the Wage Structure of the Annual Salary System Following the Improvement of the Rank System

In the case of an annual salary system, if the rank system is simplified, the existing salary bands for each rank must be converted into new salary bands. In this case, the upper and lower limits of the integrated rank can include both the upper and lower levels of the rank that was subject to integration, so there is no particular difficulty in this case. Also, if the overlap ratio of the salary bands is high and there are sufficiently overlapping periods, the wage increase standard can be set after consolidation around the basic annual salary level that was paid the previous year, provided that sufficiently overlapping periods exist.

 However, even when operating under an annual salary system, if the meaning of the starting salary for each rank is clear and there is no overlap at all, individual advantages and disadvantages will emerge. In this case, careful attention must be paid to ensure that no employee suffers any disadvantage due to changes in their rank. Therefore, it is desirable to enable the motivational effect by allowing employees who currently hold the highest salary band among existing rank holders and have outstanding performance to be promoted through a review of their promotion eligibility at the time of integration. However, if employees who were at the upper end of the salary band due to reasons such as length of service, regardless of performance or capability, are disadvantaged by the rank integration, a temporary band section should be set at the upper end of the integrated band instead of raising the upper limit of the band itself; after operating the temporary band until they leave the corresponding rank band through promotion, the newly designed band’s

It is desirable to maintain the range spread.

 Of course, in the case of a single-step pay scale, its application is relatively easier compared to a rank-based pay scale. However, even in a single-step pay scale, the rate of increase varies by step, so for employees who are approaching a step where a change in a specific grade exists, there may be advantages or disadvantages depending on which grade is applied after the change. Therefore, companies must clarify the principles for assigning new job grades and apply a consistent standard to all employees subject to grade changes.

                                               <Figure 4> Case Study of Rank System Improvement

Other Considerations When Improving the Rank and Compensation Systems

When attempts are made simultaneously to improve the rank system and the compensation system, in most cases they aim to bring about changes across the entire linked personnel system as well. Because, due to the nature of the personnel system itself, it is impossible to achieve the effectiveness of a personnel strategy by improving only individual systems in a specific area. In this case, each employee may have a different position, but in some respects advantageous changes and, in other respects disadvantageous changes are inevitably brought about. Therefore, employers must obtain workers’ consensus in advance regarding the purpose of the system improvement and the need for change, and after the improvement, the work rules or personnel regulations must be revised; if there is a possibility of disadvantageous changes to the work rules, collective consent from the majority of workers must be obtained. Also, if there is a labor union organized with a majority or more

We must reach an agreement with the relevant labor union.

 In addition, when attempting broad improvements to personnel systems to enhance a company’s future competitiveness in a market environment entering a low-growth phase, it is essential to prepare on the basis of building a preliminary consensus among members of the organization on how to explain and make the newly designed systems understood by employees or the labor union. A negotiation strategy must also be carefully established on how to reach an agreement with the labor union regarding the systems designed for this purpose. We must not overlook the fact that preparing for environmental changes so that the systems painstakingly established for the maintenance and survival of companies can be practically applied is just as important as designing useful systems.

Consulting inquiries (CEO Myunghwan Jeon): cplajmh@eoncg.com

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