Challenges of Globalization and Multiculturalism on South Korea s HRM and Its Transformation Trends

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1 Challenges of Globalization and Multiculturalism on South Korea s HRM and Its Transformation Trends SHI Xiang (Nanjing University of Aeronautics and Astronautics, Nanjing , China) Abstract Through decades of efforts, South Korea had developed a relatively mature human resource management (HRM) system in the region of East Asia. However, the globalization process and multiculturalism has substantially challenged South Korea s traditional HRM practices. This paper looks into South Korea s HRM practices and their links with the traditional Korean culture. It then discusses the process of globalization and multiculturalism in South Korea and the reactions and responses of its HRM practices, followed by analysis of some new transformation trends of employment types, compensation structure, and evaluation system in South Korea s HRM. Keywords: challenges, globalization, multiculturalism, HRM, South Korea, transformation trends 1. Introduction As stated in former President Kim Dae-jung s inaugural speech on 25 February 1998, the Republic of Korea had become the world s eleventh largest economy.[1] The rapid economic growth can be attributed to the industrious Korean people, the government and the Korean business management system which includes its human resource management (HRM). Korea has been influenced by globalization and multiculturalism in many aspects including its democratization, development, foreign relations, and a range of other related social and cultural issues. By changing the competitive corporate environment in Korea, globalization and multiculturalism have challenged the traditional Korean HRM which is based on Confucian family values. This paper looks into Korean HRM practices of employment, compensation, and evaluation. After a brief look at the traditional Korean practices and their links with the traditional Korean culture, this paper discusses the process of globalization and multiculturalism in South Korea. Then, the reactions and responses of Korean HRM are analyzed and some new trends in the transformation of Korean HRM strategies are examined. 2. Traditional Korean HRM Due to unique national characteristic and culture of Korea, traditional Korean HRM differs from the practices in other countries, especially the Western countries whose cultures and values are substantially different. Koreans strictly abide by their established social and cultural norms. Therefore, HRM in Korea can be effective only when it complies with these norms. Confucian values are dominant in the traditional Korean HRM practices

2 2.1. Long-Term Employment Traditionally, Korean companies maintain an internal labor market policy to recruit graduates from distinguished universities, i.e. open recruitment, and train them to be warrior workers. Samsung first applied this practice in 1954, followed by Hyundai and other conglomerates.[2] This internal labor market policy is a critical characteristic of Korea s traditional employment. There is no standard retirement age in Korea. Normally, university professors retire at 65, and government staffs retire at 60 while most employees retire at 55.[3] Korean companies prefer long-term employment to layoffs. Before the Labor Law was amended in 1997, layoffs had been prohibited in Korea. Traditional Korean employment practices are typical easy exit and difficult layoff (see Table 1). In Korea, labor s turnover was very low. The internal labor market is one reason, and another one lies in the Korean people s attitudes towards turnover. Traditionally, most Korean people believe that a frequent change of occupation is caused by lack of adaptation.[4] In short, traditional Korean employment practices are long-term employment with difficulty in making layoffs. Table 1. Comparison of Employment Practices Exit Layoff Easy Difficult Easy USA Korea, Germany Difficult China, Russia Japan (Source: Choi, 1996) 2.2. Seniority-Based Compensation The wage structure in Korea is complicated. The monthly payment is composed of basic wage and salary, which accounts for 65% and various allowances which account for 35%. A bonus payment is made every other month. The amount of bonus payment is often equal to a regular monthly payment.[5] Usually the Korean employees are paid 17 monthly compensation payments in a year. This complicated system keeps basic wage and salary levels low, so that by changing the optional allowance amount, an employer can manipulate the compensation system. The compensation differences are based on education, age, sex and seniority (see Table 2). Table 2. Compensation Differences Education Monthly Salary (Korean Won) College Business 303,779 Engineering 314,172 Technical College 246,172 High School Technical Business All Female Junior High Schools Male Female 212, , , , ,

3 (Source: Korean Employer Federation, 1987) 2.3. Formalized Evaluation Evaluation is an important function in HRM and it is commonly practiced in Korea. A formalized seniority system prevails in Korean employee evaluation. Direct application of an objective evaluation is restricted. Therefore, two or three superiors often evaluate each employee at a time. In general, not much attention was paid to performance evaluation because performance did not really affect promotion and compensation.[6] Promotion was based on seniority and there were no individual incentives in the compensation system.[7] In fact, both the Korean management and the employees merely take performance evaluation as an annual formality Foundation of Traditional Korean HRM As Confucianism values family, there are strong family-oriented characteristics in traditional Korean HRM. Management developed HRM practices in accordance with the family ideology. The lasting relation with the company, difference of status based on the length of employment at the company, and the interest of the company in personal affairs of the employees are based on the concept of the unique Korean family tradition. All the traditional HRM practices of long-term employment, seniority-based compensation and formalized evaluation reflect the common strategies that Korean companies adopt. In order to maintain the harmony in consistence with Confucianism, Korean companies provided a sense of solidarity among employees at work to make them feel like family members.[8] Meanwhile, companies tried to form firm consciousness to build trust and understanding with employees. Besides working relationships, companies endeavored to establish social relationships with employees by a range of means such as attending employees individual celebration. 3. Globalization and Multiculturalism in Korea As a sole-nationality country, South Korea had well reserved its tradition and family-oriented Confucian values in history.[9] But after its economy took off in the 1970s, it is no long a Hermit Kingdom. Globalization and multiculturalism have changed this country and its management. Former President Kim Young-sam first formally introduced the Korean concept of globalization in In fact, Korea participated in the globalization process many years prior to President Kim s introduction. Since the 1970s this country has achieved high growth rate for nearly two decades. It participates in the globalization process and opens up for different cultures and values. By participating in the process of globalization, Korea has absorbed from the outside world the advanced management practices, behind which are different cultural values. In order to live through the process of globalization, Korea has endeavored to adapt to the different values and practices. The democratization in 1987 was a direct result of Korea s globalization. In order to play an active role in the process of globalization, Korean government and the companies have adopted a range of new policies, which make them more competitive. In HRM, the traditional practices became barriers to the - 3 -

4 Korean companies competitiveness in the globalization process. The long-term employment, seniority-based compensation and evaluation systems do not encourage employees motivation and incentive to increase the company s productivity and competitiveness, which may lead to loss in its competition against its rivals. Globalization imposes pressure on both Korean government and companies to change. 4. Transformation of Korean HRM The year of 1995 is a turning point for Korean economy. In this year Korea s high-rate economic growth started to slow down to a stabilized growth. Korea was taking steps for the new advance and facing the challenges of globalization. Korean companies had to launch reforms in their practices in order to adapt to the new environment. Korean companies are taking reforms in HRM to the customary protection and practical affairs in addition to the structural reform and technology innovation to handle the pressure entailed by globalization More Flexible Employment The traditional long-term employment has been disturbed. Samsung has dropped the knowledge test in the traditional recruitment and Hyundai has replaced it with an aptitude test for the applicants.[10] Recently, Korean companies recruit not only the entry-level workers but also the experienced middle workers. Large open recruitment was effective when the labor cost was low, but as the labor cost has risen to a high level, companies are changing to adopt recruiting on demand. Companies are dismissing over-employed workers through big structural reforms. These surplus workforces were slack employees for new business and key resources to response with new opportunities.[11] In employment perspective, recruiting full-time workers is replaced by recruiting contingent workers (see Table 3), which means family-oriented community focusing on full employment is changing. Companies start to lay off workers as Labor Law was amended in 1997 and the rigidity of layoff has dissolved. Attitudes to turnover are changing. More and more people accept turnover as a way to self-improvement and self-development. Employees prefer lifetime employability to the traditional lifetime employment. Table 3. Trend of Contingent Worker Ratio Year Ratio (%) (Source: National Statistical Office of the Republic of Korea, 2001) Note: contingent worker = temporary workers (contract term under one year) + daily workers (contract term under one month) 4.2. Performance-Based Compensation Performance has become an important factor in compensation, as Korean companies are trying to increase their productivity by rewarding performances.[12] Traditionally, the employees compensation depended on the company s performance. Both basic salary and allowances were based on position and seniority. The traditional compensation system is rather group incentive than individual incentive, which does - 4 -

5 not encourage individuals to perform a higher level. With the globalization process and influence of a diversity of cultures, Korean companies have introduced individual incentives into the basic salary.[13] Samsung has divided the basic salary into two components: base pay and performance pay. The former is still based on position and seniority, but the latter depends on individuals performances. At Samsung, performance pay in the basic salary accounts for 68% for managers, 64% for senior associates and 42% for junior associates.[14] Thus, the variable portion is greater for higher ranks. Many Korean companies have adopted performance-based annual salary system and flexible bonus system (see Tables 4-5). All these changes help Korean companies establish individual incentive systems so that productivity can be increased. Table 4. Trend of Adoption of Annual Salary System Year Adopting firms (ratio) 94 (1.6%) 205 (3.6%) 649 (15.1%) 932 (23.0%) 1,275 (27.1%) (32.3%) Sample size 5,830 5,754 4,303 4,052 4,698 4,998 Table 5. Trend of Adoption of Flexible Bonus System Year Adopting firms (ratio) 334 (5.7%) 405 (7.0%) 689 (16.0%) 833 (20.6%) 1,025 (21.8%) (23.4%) Sample size 5,830 5,754 4,303 4,052 4,698 4,998 (Source: Ministry of Labor of the Republic of Korea, 2002) 4.3. Reformed Evaluation Traditionally, little attention was paid to performance evaluation because performance did not really affect promotion and compensation. Both management and employees take performance evaluation as an irrelevant annual formality. But to compete with rivals in the process of globalization, Korean companies need more capable and competent employees. Individual incentive plays a crucial role in the improvement of employees performances. Nowadays, more and more Korean companies apply the new performance-based HRM policy on promotion and compensation. To make the evaluation fair and trustworthy, substantial changes have been made. Supervisors are required to keep a diary on the activities and grievances of employees, so that the employees performances can be considered over the entire evaluation period. To make the evaluation impartial, a 360-degree evaluation is introduced. Evaluators now include supervisors, subordinators, customers and suppliers. Samsung has introduced a mandatory evaluation interview: evaluation of performance is done through an interview with the supervisor, and a capability evaluation is done through another interview with the supervisor.[15] 5. Conclusion Korean HRM is at a turning point now. It is mixing traditional cultural characters and new environmental challenges of globalization and multiculturalism

6 Korean companies have improved rapidly through government s economic development plan since This growth comes from not only progressive entrepreneurship but also the Confucianism-oriented Korean HRM. Korean companies had grown rapidly through seniority-based HRM practices activating Confucianism. But these traditional practices became obstructions under the changing environment, i.e. globalization and multiculturalism. Therefore Korean companies have to introduce incentive system for employment flexibility and individual creativity to respond to the more competitive environment. Since early 1990s many companies have adopted new HRM strategies including flexible employment, performance-based compensation and evaluation. Some companies have maintained their traditional HRM practices, which are based on the advantage of Confucian ideology, and at the same time, they have adopted HRM strategies based on performance. As a newly industrialized country, South Korea has advanced its economy in the process of globalization. The transformation of its HRM strategies substantially contributes to its success. In short, globalization and multiculturalism have challenged the traditional Korean HRM and as a result have changed the Korean HRM. More study needs to be done on the influence of Asian Financial Crisis on Korean HRM and its transformation. References [1] Kim, Dae-jung (1998) Presidential Inaugural Speech on 25 February 1998 in Korea Herald on 26 February Seoul [2] Ozaki, Robert (1991) Human Capitalism. New York: Kodansha International [3] National Statistical Office of the Republic of Korea (2001) Economically Active Population Survey. Seoul [4] Clark, Donald N. (2000) Culture and Customs of Korea. London: Greenwood Press [5] Choi, Jong-tae (1996) Strategic Industrial relations. Seoul: Kyung Moon Publication Co. [6] Kim, Samuel S. (2000) Korea s Globalization. Cambridge: Cambridge University Press [7] Chang, Chan-sup & Nahn, Joo-chang (1994) The Korean Management System. West Port: Quorum Books [8] Chun, Shin-yong (1980) Customers and Manners in Korea. Seoul: International Cultural Foundation [9] Ha, Tae-hung (1968) Guide to Korean Culture. Seoul: Yonsei University Press [10]Ministry of Labor of the Republic of Korea (2002) The Inquiry of Annual Salary and Gainsharing Plan. Seoul [11]Dore, Ronald (1973) British Factory, Japanese Factory. Berkeley: University of California Press [12]Steers, Richard M., Shin, Yoo-Keun & Ungson, Gerardo R. (1989) The Chaebol: Korea s New Industrial Might. New York: Harper & Row [13]Hillebrand, Wolfgang (1996) Shaping Competitive Advantages: Conceptual Framework and the Korean Approach. London: Frank Cass [14]Samsung (1988) The History of Samsung s 50 Years. Seoul [15]Choi, Jong-tae (1996) Strategic Industrial relations. Seoul: Kyung Moon Publication Co

7 全 球 化 和 多 元 文 化 对 韩 国 人 力 资 源 管 理 的 挑 战 及 其 转 型 趋 势 施 翔 ( 南 京 航 空 航 天 大 学, 江 苏 南 京 ) 摘 要 : 通 过 几 十 年 的 努 力, 韩 国 已 建 立 了 一 套 在 东 亚 地 区 相 对 成 熟 的 人 力 资 源 管 理 体 系 然 而 近 年 来 全 球 化 和 多 元 文 化 对 韩 国 传 统 的 人 力 资 源 管 理 模 式 构 成 了 相 当 大 的 挑 战 本 文 介 绍 了 韩 国 人 力 资 源 管 理 及 其 与 韩 国 传 统 文 化 的 联 系, 并 讨 论 了 全 球 化 和 多 元 文 化 对 韩 国 人 力 资 源 管 理 的 冲 击 及 其 反 应 最 后 本 文 分 析 了 韩 国 人 力 资 源 管 理 转 型 中 在 雇 佣 方 式 报 酬 结 构 评 价 体 系 等 方 面 出 现 的 几 个 新 趋 势 关 键 词 : 挑 战, 全 球 化, 多 元 文 化, 人 力 资 源 管 理, 韩 国, 转 型 趋 势 - 7 -