The Supreme Court recently ruled that management performance bonus pay should not be considered as part of employees’ ordinary wages. The calculation of such pay depends significantly on factors that are not closely related to or controlled by labor. Accordingly, performance-based pay should not be included in calculating average wages for the purposes of severance and other benefits.
The ruling, released on January 29, 2026, and comprising three separate decisions, addresses a long-standing issue for private companies on the treatment of management performance bonus pay (i.e., bonuses where performance measures are more collective in nature). The issue presented in the matters before the court concerned whether the plaintiffs’ severance pay ought to have encompassed their annual performance bonuses and semi‑annual fixed‑target incentives, which had been excluded from the severance calculations by the respective employers.
The court found that because the payment amount of the management performance-based pay in question depends directly on the economic value added (EVA) of the overall business unit — over which employees have little direct control or influence — the management performance-based pay is not directly or closely related to the quantity or quality of labor provided and therefore should not be categorized as ordinary wages.
In contrast, the fixed‑target incentive at issue was determined pursuant to a predetermined formula, and its payment was contingent upon the attainment of specified financial performance metrics and strategic task objectives. The court found these targets to be directly or closely connected to the employees’ provision of labor and to be matters over which business units exercised meaningful control. Accordingly, the court held that the fixed‑target incentive should properly be regarded as part of ordinary wages.
Another decision — issued on February 12, 2026, by the Supreme Court concerning a leading Korean semiconductor manufacturer — applied the same legal principles as those referenced in the earlier severance pay case. The court clarified that management performance bonuses are determined by company profitability and EVA, causing actual payouts to fluctuate significantly and not be directly tied to the quantity or quality of labor.
Among companies surveyed, around half include performance-based pay in the calculation of covered pay for South Korea’s Severance Pay Scheme (SPS) and under Employee Retirement Benefit Security Act (ERBSA) plans. Other labor costs and liabilities for payments based on ordinary wages, such as pay in lieu of notice and pay for unused leave, may also be affected. Employers should review their compensation policies and consult with legal counsel on the implications of the ruling as it relates to wages used in benefit calculations under SPS and ERBSA plans.
