Bonus · Incentive Pay Design
Bonus & Incentive Design
What is a bonus?
- Payment conditions determine the legal nature
- Set four things: what pay is tied to, the funding source, how it is allocated, and the conditions
- Repeated payments harden into practice and create expectations
Whether pay counts as a bonus or a performance bonus is decided not by the line-item name on the pay slip but by the conditions written in the payment rules. Even something called a 'performance bonus' is more likely to be treated as wages once a history builds up of paying 200% of base pay on a fixed date every year without exception, while a record of actually withholding payment in years when targets were missed changes the assessment. That is why designing a performance bonus is both a motivation exercise and work that decides in advance the basis for future ordinary wage and severance calculations.
Whether something counts as ordinary wage depends on whether it is paid regularly and uniformly as compensation for scheduled work. In December 2024, the Supreme Court en banc reversed its earlier position, holding in effect that a regular bonus can be included in the ordinary wage even when it carries a condition such as 'employed on the payment date'. The old design formula, where a single continued-employment clause kept you safe, no longer works. Conversely, a performance bonus whose payment and size genuinely varied from year to year with company results may be assessed differently, so the dividing line is whether the link to results is shown by payment history, not just on paper.
That is why, at the design stage, it matters to pin down the funding formula and distribution rules in numbers. Write the bonus pool into the rules as a formula, such as '○% of operating profit', state in writing that nothing is paid if targets are missed, and set upper and lower limits on the distribution rate for each grade. It also helps to set the variable-pay share separately by job family: wide for sales roles, where performance can be measured individually, and narrow for production roles, where most output comes from teams.
The biggest gap between theory and practice shows up when you cut pay. A performance bonus paid the same way for several years hardens into a working condition, so reducing it by amending the rules requires the unfavorable-change procedure for the rules of employment and collective consent from a majority of employees. Some companies declare that 'bonuses are at the company's discretion' and stop them with a single notice, only to face unpaid-wage claims and a retroactive settlement covering the three-year statute of limitations. Keeping a payment history consistent with the written rules is far safer than renaming line items, and the legal nature of any specific case should always be reviewed by an expert.
Jongmu KimSpecialist in corporate talent development and job competency building
Hwi KimCEO of HRDIST & talent development system consultantPerformance-based HR spread, and with it many kinds of bonus and incentive plans. As court rulings accumulate on the legal nature of such pay, including whether regular bonuses count as ordinary wages, the way payment conditions are written matters more.
Consider a hypothetical case. Company A makes auto parts, with 210 employees and KRW 52 billion (≈ US$38,904,700) in annual revenue. It had been paying a regular bonus of 600% per year in installments every two months, and for the past two years had added a separate management performance bonus on top. It began when news of ordinary-wage lawsuits at peer companies spread and the CEO told the team to 'check whether we're okay'.
- When the HR head re-read the pay rules, only 400% of the 600% carried the clause 'only employees on the payroll on the payment date are eligible,' while the other 200% had been paid every other month with no conditions attached.
- The company's labor attorney pointed out that "a continued-employment requirement doesn't make you safe, and under the current structure, all 600% is open to dispute," so the finance team ran a simulation. The hourly ordinary wage would jump from KRW 9,800 (≈ US$7) to KRW 14,600, (≈ US$11) and overtime and holiday pay alone would rise by KRW 320 million (≈ US$239,400) a year.
- When the CEO asked, "Then why don't we just eliminate the bonus?", the labor attorney replied that this would be an unfavorable change to the work rules, and a majority of employees would have to consent first. The company held three labor-management council meetings.
- The agreed plan was to fold 200% of the regular bonus into base pay, recognizing it as wages, and to convert the remaining 400% into a performance bonus funded by 8% of operating profit, with a clause in the company rules that nothing is paid if operating profit falls below KRW 2 billion (≈ US$1,496,300).
- Distribution was set at 60% department results and 40% individual evaluation, with explicit caps and floors of 150% of base pay for an S grade and 50% for a C grade. For production staff, the gap between grades was halved to reduce pushback.
- One year after rollout, total labor costs rose just 1.8% year over year, the variable-pay share rose from 12% to 21%, and not a single wage-related complaint or lawsuit was filed.