Wage Peak System
Wage Peak System
What is a wage peak system?
- A system that adjusts wages after a set age while maintaining employment
- Pure pay-cut systems with no countermeasures risk being judged discriminatory
- Changing the rules of employment requires a formal procedure and employee consent
What a wage peak system changes is not a single line in the pay table but the entire employment contract for the years remaining until retirement. Pay is reduced in steps once an employee passes the peak of the wage curve; in return, the company commits to a period of employment, and the employee receives duties and responsibilities that match the lower pay. Because it is work that rebalances pay and workload together, leaving job grades and work assignments untouched in the HR records and changing only the salary is closer to a unilateral pay cut than to a system. There must be a paper trail showing what was taken off the employee’s plate in return for the pay reduction.
There are three main types. The first is the retirement-age extension type, which raises the retirement age from 60 to 62–65 while adjusting pay. The second is the guaranteed-retirement-age type, which keeps the already secured retirement age and only cuts pay. The third is the rehire type, which re-employs workers on contracts after retirement. In practice, many designs set the peak at age 56 or 57 and reduce pay by 10–20% per year over 3–5 years, sometimes adding a reduced-hours option that cuts the 40-hour week to 32 hours. The guaranteed-retirement-age type offers the weakest compensation in return, so disputes concentrate there. Introducing a wage peak system counts as a change to the rules of employment, and if the change is unfavorable to employees, it requires collective consent from a majority union or a majority of employees.
The most common misconception in the field is, “Retirement at 60 is now mandated by law, so a wage peak system is obviously justified.” That holds if the system was designed in exchange for extending the retirement age. But if employees already had guaranteed retirement ages and only their pay was cut, it is hard to say what was given and what was received. If workloads and targets stayed the same, and the company said the savings would fund new hires but left no trace of doing so, the system can be challenged as unfavorable treatment based solely on age. The consent process also often falls apart. Having department heads circulate a list to collect signatures may not count as a collective decision, and in that case the company faces retroactive payment of the reduced wages, plus a recalculation of severance pay. Before revising the system, be sure to review the latest statutes and case law and consult a labor law specialist.
Jongmu KimCorporate talent development and job skills specialist
Kyungtae KimHR expert · Organizational culture and HR strategy consultantA pay adjustment system that spread amid discussions of retaining older workers and extending the retirement age. The Supreme Court has held, in effect, that cutting pay based solely on age without a reasonable basis can amount to age discrimination.
Let’s look at a hypothetical case. Company A makes auto parts and has 620 employees, 480 of them in production. Since 2016, it has run a guaranteed-retirement-age wage peak system that cuts pay by 10% each year for four years, starting at age 56. Last year, three covered employees who retired demanded the reductions be returned, saying, “Our retirement age was 60 anyway, and we got nothing in return.” That prompted HR to take the entire system apart and review it.
- When the HR manager pulled out the 2016 introduction documents, the retirement age had already been fixed at 60, and all that remained was a plan to use the KRW 320 million (≈ US$239,400) in savings for new hiring.
- A comparison of job descriptions for the 48 covered employees showed that night shifts and production targets stayed the same even after the peak, and the head of production opposed any adjustment, saying, “If we cut the targets, the line won’t run.”
- After a review by a labor law firm, the company drew up a plan that delays the peak to age 57 and lowers the annual reduction rate from 10% to 7%, while exempting employees from night shifts and cutting the workweek from 40 to 35 hours.
- After four rounds of negotiation with the union chair and six briefings for each production line, the company secured consent not through signatures circulated by department but through a vote of all union members, with 71% in favor.
- After the redesign, the 4-year cumulative wage reduction for covered employees fell from 34% to 21%, and the KRW 200 million (≈ US$149,600) in savings funded 6 new production hires. Related complaints dropped from 3 to 0.