Going Global: Employee Ownership in South Korea

By Otto Lange

Recent legislative changes may cause a rapid increase in South Korean employee ownership plans.

Shortly after the Korean War, the Yuhan Corporation established South Korea’s first employee stock ownership plan (ESOP) in 1958 to resolve labor disputes. The Capital Market Act of 1968 established employee ownership requirements and created the legislative environment surrounding ESOPs. ESOPs were originally intended for public companies, and required 10 percent of newly issued shares to be allocated to employees. Over the years, various Korean Assemblies and presidents have updated the legislation and encouraged employee ownership.

Despite these efforts, costs were often too high for companies, and employees would need to pool resources together to acquire shares for the ESOP. There was little information about employee ownership, and employees feared that when their company failed, they would not only lose their job but also their savings on the stock market. As a result, only 0.6 percent of Korean companies established some form of employee ownership, and employees held a measly 1.29 percent of outstanding shares in 2012.

In 2015, after labor strikes with Hyundai Motor Company and Kia Motors, employee ownership legislation was updated and revamped in Korea. If an employee held company shares for six years, any recognized gains on the stock were exempt from income tax and considered ‘separate’ from their wages. Companies could benefit by reducing their taxable income by the maximum contribution limit of 48 million Won ($43,000) per year to employee ownership plans. Corporations that funded internal markets to buy/sell shares among employees would benefit from additional tax deductions.

Unlike the United States’ definition of ESOPs as a retirement plan, Korea defines employee ownership as a "bonus" that supplements normal wages. The recent legislation granting tax benefits for companies and employees, however, may change that perception. Companies may soon perceive ESOPs and other employee ownership programs as a strategic effort to attract and retain talented employees. Employees will then start to see ownership as an opportunity.

Company Overview: CNUS Co., Ltd. in Shiheung, South Korea

Recently, I sat down with Tae-Hyun Kim, “Kim,” to discuss employee ownership at his family’s business CNUS Co., Ltd. Kim is studying for his MBA at the University of California, San Diego before returning to South Korea in 2018. He explained that since arriving in California, he became exposed to employee ownership programs and now has a strong interest in establishing one for his family’s business.

tae hyun kim

Kim’s father founded CNUS, Co., Ltd. in 1993 and still serves as CEO. CNUS is a B2B manufacturer of replacement parts for semiconductor and LCD manufacturing equipment. With the explosion of the cell phone industry and smart devices, their company has thrived over the past 24 years, and benefited from a strong relationship with Samsung.

Today, CNUS employs 100 workers and conducts 40 percent of its business internationally. As the semiconductor industry is maturing and competition has increased, Kim says that CNUS has started to face challenges. Now—more than ever—CNUS needs to stay efficient and maintain its competitive advantages. However, employee turnover has recently increased and their efficiency has decreased.

Kim believes the problem lies with motivation. Although their employees are extremely loyal to the company, they often work long hours and are underpaid relative to comparable companies. Employees on the assembly lines are paid hourly, and Kim says this has led to some employees pushing back work until after-hours to get overtime pay.

Kim feels that establishing an ESOP or another employee ownership program would be a fantastic way to improve employee performance. Not only would CNUS benefit from tax-deductible contributions, but Kim wants his employees to be more engaged and committed to the company’s long-term success.

If Kim and his family establish an employee ownership plan for their employees, they may be at the forefront of a rapidly growing industry in Korea. Small- and medium-sized businesses in Korea are expected to face increased competition with Chinese companies over the next decade, and Korean business owners will be pressured to offer their employees additional compensation for their efforts. ESOPs and other employee ownership plans may well be that differentiating benefit to attract and retain top talent.

For more information on CNUS, Co., Ltd., please visit their website: http://cnus.koreasme.com/main/index.html

otto lange
Otto Lange, graduate student associate, Beyster Institute and Rady MBA candidate 2018

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