Government Eases Corporate Incentive Standards

The South Korean government has made changes to incentives that benefit 13 government-aided institutions. Those institutions received 96.7 billion won more in incentives last year alone.

Critics point out that the government has contributed to the moral hazards of state-run institutions, though it has frequently expressed a strong will to reform them through carrying out special audits by the Board of Audit and Inspection,

According to a document presented to GNP lawmaker Kim Tae-whan Tuesday, 13 organizations that receive government investment, including the Korea Electric Power Corporation and the Korea Land Corporation, have been benefited from the Ministry of Planning and Budget’s changes in corporate incentive standards for the past three years.

In 2002, when the government incentive system first started, the highest incentive payout rate (500% of basic salary) was only given to those companies that scored a 100 on their management performance evaluations. However, in 2003 the score standard dropped to 87.5, and in 2004 the rate system itself was changed to allow the companies with the highest scores to receive the maximum incentive rate, regardless of the actual scores themselves.

Thus, when the Korea Electric Power Corporation received a management performance score of 80.51, it still was given the maximum incentive rate because no other corporations got higher scores. If the 2002 standard was applied, the corporation would have received 63 billion won less incentive money from the government.

The Korea Land Corporation recorded a score of 79.08 for its performance last year. If the system had not changed, it would have received 5.5 billion won less.

Since the standard changes, the Korea Resources Corporation, which earned the lowest evaluation score, was the only company that received fewer incentives, 300 million won less.

The average performance evaluation scores of 13 government-funded institutions decreased from 75.83 in 2002, 75.71 in 2003, and 75.44 in 2004, while incentives have increased in those years by 307 percent, 349 percent, and 378 percent, respectively.

The government’s change in its incentive standards resulted in incentive growth no matter how poorly companies performed.

The Ministry of Planning and Budget explained that the change was originally aimed to clearly differentiate the between the efficient organizations and poorly-performing ones, but it admitted that the change in the government’s incentive standards resulted in an increase in incentive payouts across the board.

The incentives are determined by a management committee for government-funded institutions at the end of every year that is attended by representatives of every institution and the Planning and Budget minister.

Seung-Heon Lee ddr@donga.com legman@donga.com