Doing business in Korea

South Korea is one of Asia’s dark horses, often overshadowed by India and China, yet its GDP is on target to reach US$1 trillion, making it the 13th largest economy in the world.

Counting Samsung and LG among its biggest global brands, the country has a strong export market; however, foreign companies expanding into the local market are faced with rigid labor legislation, a strong union presence and a unique culture. They must address the critical issues of attracting and retaining key talent, ensuring compliance with local legislation and understanding mobility challenges up front if they are to succeed.

Attracting and retaining top talent
Many multinationals are setting up operations in South Korea to gain access to country’s large number of consumers, and pool of world-class talent in the electronic, pharmaceutical and chemical sectors. And while there is a talent war underway, many university graduates are keen to work for a foreign organization as they believe this will lead to wider career development and learning opportunities. They want to gain more global experience, as this will increase their market value. As such, foreign organizations need to promote their global assignments, especially to the younger generation. However, these in-demand, talented graduates may only want to join a well-known global brand, making it harder for lesser-known brands from small- and medium-sized organizations to attract key staff. The main drivers are compensation, job security and career opportunities.

Ten years ago, South Korea suffered a financial crisis that cut its leadership supply. Now, as a result, talented leaders are in short supply and so there is a heavy focus on succession planning. But local companies have less demand for executives than multinationals, and therefore don’t face the same challenges.

There are huge cultural differences in doing business in South Korea, which are just as rigid as those of Japan but less well-documented. South Korea has a strong usage of titles in the workplace that goes beyond traditional Western positions such as executive, junior or team leader. There is also a culture of lifetime job security, which means there is not an active labor market. Graduates are guaranteed a long-term career with an organization. There is, however, internal activity as employees move within their organization.

There is a strong need among the South Korean workforce for employee engagement. Staff appreciates being communicated to in person and they enjoy employee activities and events. Employee engagement is a valuable retention tool for any organization.

Many multinationals are starting to manage their talent better. Around half of university graduates are women, so organizations are appealing to them by offering a good work/life balance. Because of this, multinationals tend to have a high ratio of female staff.

Ensuring compliance with local legislation
Unions are powerful within South Korea’s labor markets. This can prove a massive hurdle to Western organizations, which may have little experience of this kind of corporate intervention. Most workplace negotiations will involve unions and will include discussions about compensation levels. Not only does this restrict a foreign organization that needs to pay above the market rate to attract talent, but it also means human capital issues take longer to resolve.

Health benefits are not commonly used as a retention tool in South Korea, given the wide coverage of its national health care system, but pensions are essential. There is a compulsory National Pension System in South Korea, into which employees and employers must each contribute 4.5 percent per year; this acts as a social security fund. In 2005, the South Korean government launched the Employee Retirement Security Act (ERSA), which gives employers the option of offering staff either a defined benefit (DB) or defined contribution (DC) scheme. But unlike the West, a DC scheme is not always the cheapest option, as generous contribution levels are set – a minimum of 8.3 per cent. As such, many Korean employers still offer their staff DB schemes. This DB dominance puts pressure on foreign organizations, as employees expect this level of pension security. With a rapidly aging population (and the world’s lowest birth rate) this burden will grow even bigger as more workers retire.

Moving critical staff to Korea
The expatriate community in South Korea is small, mainly because of language and cultural barriers, and expats tend to fill senior, C-suite positions.

South Korea’s domestic market is limited to organizations that rely heavily on exports. Samsung and LG are two of the biggest exporters. Export-driven companies need leaders with global knowledge as they expand, so these organizations compete with foreign multinationals for the same labor pool, and are becoming more global in their outlook.

If your company plans to move employees into the local market, there are several tactical considerations you should address when developing their remuneration packages. The employee’s base salary should be comparable to the home market, so you may need to consider the tax implications of such a move.

Ake Ayawongs, Mercer's ASEAN business leader, Mergers & Acquisitions consulting business