Supreme Court partially recognises performance bonuses as wages

At a glance

• The Supreme Court (Court) has clarified when corporate performance‑based bonuses qualify as 'wages', reaffirming existing principles but applying them with greater precision.
• It distinguished between Company S’s profit‑sharing incentive (PS), which was found not to be wages, and its productivity incentive (PI), which was recognised as wages.
• The PI’s predictability, direct link to labour, and stable fluctuation range led the Court to classify it as part of the wage system.
• As a result, retirement benefits must be recalculated to include PI amounts, which will significantly influence wage structures and severance calculations going forward.
• The ruling provides a clearer framework for differentiating between profit‑based bonuses and labour‑related incentives.

This article has been reproduced with the permission of the authors Weon Jung Kim, Paul Cho, Hyeon Tae Bae, Ki Young Kim, Sun Ha Kweon and Hoin Lee at Kim & Chang. 

The Court has recently issued a landmark ruling on whether corporate performance-based bonuses qualify as 'wages'.

While the Court recognised performance bonuses as wages for public institutions back in 2018, it has taken a stricter case-by-case approach for the private sector. Historically, for a private sector performance bonus to qualify as wages, it had to meet the following three conditions:

• The bonus is paid in consideration for labour.
• The employer has an obligation to pay the bonus.
• The bonus is paid continuously and regularly.

Specifically, regarding the 'consideration for labour' criteria, the Court’s stance has been that a bonus constitutes wages only if it is 'directly or closely related to the employee’s provision of labour.'

While reaffirming these existing legal principles, the Court distinguished between the two types of bonuses paid by Company S, the PS and the target incentive PI.

The Court ruled that while the PS does not constitute wages, the PI qualifies as such. Consequently, the Court held that previously paid retirement benefits (eg, statutory severance) must be recalculated to include the PI amounts. This decision is expected to have a profound impact on the calculation of retirement benefits and wage system practices going forward.

What facts truly matter: Distinguishing PS from PI

Company S paid the PS once a year and PI twice a year (semi-annually) based on targets specified in its Rules of Employment but excluded both of these payments from retirement benefit calculations. The lower court agreed with Company S, viewing both the PS and PI as a distribution of profits rather than wages. However, the Supreme Court remanded the case, drawing a sharp line between the two.

Why the PS was not recognised as wages

The Court ruled that the PS was not wages because it essentially operates as a profit-sharing model tied to Economic Value Added (EVA), functioning as a distribution of management profits rather than consideration for labour. Some of the factors considered by the Court were as follows:

• External factors: The PS was funded by 20% of the division’s EVA. The Court noted that EVA is driven by factors beyond an employee’s labour and control, such as the amount in capital, expense levels, market conditions, and executive decisions.
• High Volatility: The payout rate fluctuated wildly (0%-50% of annual salary) each year. The Court reasoned that the quantity and quality of an employee’s work do not fluctuate to such extremes.
• Profit Precondition: Since the PS was conditional on the company generating EVA, it was viewed as a 'post-facto distribution of profit' rather than a 'post-facto settlement of labour.'

Why the PI was recognised as wages

Conversely, the Court ruled that the PI was wages because it functions as a productivity incentive tied to specific goals, serving directly as consideration for labour. Some of the factors considered by the Court were as follows:

• Predictability: The payment formula was fixed in advance (ie, base amount × departmental payment rate).
• Direct link to labour: The evaluation criteria (eg, completion rate for strategic tasks, departmental ratings, etc) were designed to reflect actual work performance rather than external market factors.
• Stability: The fluctuation range was stable (ie, 0%-10% of annual salary), resembling variable pay within an institutionalised wage system rather than a temporary benevolent gratuity.

Significance of the ruling

On the same day, the Court issued a separate ruling regarding another company, deciding in favour of the company and finding that its 'Special Performance Bonus' was not recognised as wages. The Court reasoned that the bonus in question was strictly contingent on 'realising net income', a metric heavily influenced by external (ie, non-labour-related) factors. Further, as the payout criteria were negotiated annually through labour-management agreements, the Court viewed it as a distribution of profits rather than a fixed wage obligation.

With numerous similar lawsuits currently pending, this decision provides much-needed clarity. By establishing a sharp distinction between bonuses tied to company-wide profits and those based on productivity goals, the Supreme Court has created a concrete framework for identifying which incentives truly function as consideration for labour.