CONTENTS
- 1. Management Performance Bonus | Background of the Dispute over Whether a Private Company's Management Performance Bonus Constitutes Wages
- - Litigation That Spread Following the Public Institution Precedent
- - Divergence among the Lower Courts' Determinations
- 2. Management Performance Bonus | The Character of a Private Company's Management Performance Bonus as Viewed by the Supreme Court
- - Determination on the Performance Incentive
- - Determination on the Target Incentive
- 3. Management Performance Bonus | The Standard for Determining Wage Character Set Out by the Supreme Court
- - Whether It Is a Precondition for Payment
- - The Degree of Variation in the Payment Amount
- - The Employee's Controllability
- 4. Management Performance Bonus | The Significance of the Judgment and Its Practical Implications
- - Practical Issues Companies Should Review
- - If You Need Assistance
1. Management Performance Bonus | Background of the Dispute over Whether a Private Company's Management Performance Bonus Constitutes Wages
A management performance bonus is remuneration paid according to a company's results, and whether it constitutes wages has a significant effect on severance pay, the calculation of average wages, claims for additional wages, and the overall labor cost structure.
In particular, where a management performance bonus is operated in a form combined with fixed pay, whether it can be regarded as compensation for the provision of labor has been a continuing point of dispute.
Until now, the lower courts have been divided over whether a management performance bonus paid by a private company constitutes the “wages” that form the basis for calculating severance pay and average wages.
Against this backdrop, on January 29, 2026, the Supreme Court successively rendered judgments reversing and remanding cases in which the wage character of private companies' management performance bonuses was at issue, setting out the standard that whether a bonus constitutes wages may vary depending on the structure and manner of its payment.
These judgments carry significant practical meaning in that, following earlier precedent recognizing the wage character of public institutions' management evaluation performance bonuses, they for the first time clearly set out an analytical framework applicable to private companies' management performance bonuses.
Litigation That Spread Following the Public Institution Precedent
In 2018, the Supreme Court recognized public institutions' management evaluation performance bonuses as wages.
Thereafter, arguments arose that management performance bonuses of a similar structure paid at private companies should also form the basis for calculating severance pay and average wages, and numerous lawsuits followed.
However, because the payment structure and funding sources of private companies' management performance bonuses differ from company to company, the lower courts produced a mix of cases recognizing and denying their wage character.
Divergence among the Lower Courts' Determinations
Some courts held that a bonus paid on the basis of financial results is difficult to regard as compensation for the provision of labor, whereas other judgments recognized its wage character on the ground that it was paid repeatedly according to fixed criteria.
With the criteria for determination thus remaining unclear, the situation continued in which an authoritative legal analysis from the Supreme Court was called for.
2. Management Performance Bonus | The Character of a Private Company's Management Performance Bonus as Viewed by the Supreme Court
In these judgments, the Supreme Court, focusing on the S Electronics case, made clear that even a management performance bonus paid by the same company must be assessed differently as to its wage character depending on its purpose of payment, calculation criteria, and payment structure.
Under the same name of “management performance bonus,” S Electronics had operated two incentive schemes of differing character for its employees.
One is a performance incentive funded by the management results of each business division, and the other is a target incentive paid according to organizational evaluation results based on base pay.
Category | Performance Incentive | Target Incentive |
Funding Source | A portion of each business division's EVA | Organizational evaluation based on base pay |
Calculation Criteria | Whether and to what extent economic value added (EVA) arose in each business division | Business sector and business division evaluation grades |
The Supreme Court, noting that even though these two incentives were operated under the same name their actual payment structures and the manner in which performance was reflected differed, assessed the wage character of each individually.
That is, the comprehensive name “management performance bonus” alone cannot support a uniform determination, and one must distinguish whether each bonus is a sum paid as compensation for the provision of labor or, instead, a sum that distributes management results after the fact.
Determination on the Performance Incentive
As to the performance incentive funded by each business division's EVA (economic value added), the Supreme Court held that it does not constitute wages under the Labor Standards Act.
As grounds, the Supreme Court cited the following points.
· The range of variation of the bonus relative to annual salary is very large, making it difficult to predict the amount in advance
· The bonus is heavily affected by external factors beyond the employee's control, such as market conditions, exchange rates, and raw material prices
Accordingly, the Supreme Court viewed the performance incentive as closer to a sum that distributes management results after the fact when such results have arisen, rather than a sum paid regularly and definitively as compensation for the provision of labor.
Determination on the Target Incentive
By contrast, the Supreme Court recognized the wage character of the target incentive.
The Supreme Court noted that the target incentive had the following features.
· The criteria and method for calculation are relatively specifically prescribed by the rules of employment, remuneration regulations, and the like
· There exists a practice of repeated payment over a certain period
· Whether and to what extent payment is made cannot be regarded as left entirely to the employer's discretion
Taking these circumstances together, the Supreme Court held that the target incentive constitutes an after-the-fact settlement for the work performance provided by the employee, that is, wages paid as compensation for the provision of labor.
3. Management Performance Bonus | The Standard for Determining Wage Character Set Out by the Supreme Court
Through these judgments, the Supreme Court made clear that whether a management performance bonus paid by a private company constitutes wages under the Labor Standards Act cannot be determined uniformly by its name or scheme design alone, but must be assessed comprehensively on the basis of its payment structure and actual operation.
In particular, the Supreme Court held that wage character should be determined with a focus on the following factors.
Whether It Is a Precondition for Payment
The Supreme Court regarded whether management results function as a precondition for payment as an important factor in the determination.
If the structure is one in which whether management results arise governs the payment of the bonus itself, it is more likely to be assessed not as compensation for the provision of labor but as a sum that distributes management results after the fact when such results have arisen.
Conversely, if payment of the bonus is already provided for as a matter of the scheme and management results merely function as a basis for calculating or allocating the amount, the bonus may constitute wages paid as compensation for the provision of labor.
The Degree of Variation in the Payment Amount
The Supreme Court also presented the range of variation and predictability of the bonus amount as a core factor in determining wage character.
It held that where the amount paid varies greatly from year to year and the range of variation relative to annual salary is excessively large, it is difficult for an employee to predict the amount in advance, so the bonus is difficult to regard as wages paid definitively and regularly.
Conversely, if the range of variation in the amount is limited within a certain bound and the bonus functions as variable pay combined with the base pay system, there is room to assess it not as a one-time payment but as part of the wage system.
The Employee's Controllability
The Supreme Court attached importance to whether the criteria for payment of the bonus are factors that can be managed and controlled through the employee's performance of work.
Where the bonus is governed by external factors that are difficult for an employee to control, such as market conditions, exchange rates, raw material prices, and management judgment, it is difficult to regard it as direct compensation for the provision of labor.
Conversely, if the bonus is linked to indicators that directly reflect the employee's effort and work results, such as the individual's or organization's work performance and whether targets are achieved, the bonus is more likely to be recognized as compensation for the provision of labor.
4. Management Performance Bonus | The Significance of the Judgment and Its Practical Implications
These Supreme Court judgments are significant in that they made clear that whether a private company's management performance bonus constitutes wages is a matter for substantive assessment of the overall payment structure, rather than of the bonus's name or any single indicator.
In the S Electronics case, the Supreme Court held that, even under the same “management performance bonus,” a target incentive paid on the premise of base pay constitutes wages, while a performance incentive funded by each business division's management results does not.
By contrast, in the L Display case and the S Guarantee Insurance case rendered on the same day, bonuses based on financial results were at issue, but the Court denied their wage character on the ground that those indicators are difficult to connect by a direct causal relationship to the labor provided by individual employees.
These judgments show that the core of the wage-character determination is not the indicator of financial results itself, but whether the result is a precondition for payment or merely a basis for allocating a sum whose payment is already provided for.
Accordingly, companies may need to review their schemes with a focus on how the management performance bonus scheme is connected to employees' performance of work and on whether the payment structure functions as a wage system.
Practical Issues Companies Should Review
Following these judgments, companies may need to re-examine their management performance bonus schemes with a focus on the following issues.
▶ Whether the structure is one in which payment is provided for and the results are merely a basis for allocation
▶ Whether the criteria and method for calculation are clearly prescribed in the rules of employment, remuneration regulations, and the like
▶ Whether it is operated flexibly at the employer's discretion
▶ Whether the bonus's evaluation indicators are directly connected to the employee's work results
▶ Whether it is governed by factors difficult for the employee to control, such as market conditions and the financial environment
▶ Whether repetitiveness and regularity can be recognized in the payment practice
▶ Whether the structure is one in which whether and how much is paid varies greatly from year to year
Factors such as the above are likely to function as core criteria for determination in future disputes over the calculation of severance pay and average wages, as well as in lawsuits claiming additional wages relating to bonuses.
If You Need Assistance
Following these Supreme Court judgments, the likelihood that a bonus scheme will be included as a basis for calculating severance pay and average wages has increased, so there may also be a need to consider the effect on the company's overall labor cost structure.
Our firm analyzes the purpose and actual operation of a management performance bonus scheme against the standards set by the precedents and reviews in advance the possibility that wage character will be recognized, together with the resulting potential risks, such as claims for additional wages and severance pay disputes.
In this way, we support companies in minimizing the possibility that their current bonus schemes will lead to legal disputes.
In addition, through collaboration with experts in related fields such as accounting, tax, and labor affairs, we provide not only legal advisory services but also comprehensive advice across business matters generally, including management and marketing.
If you need legal advice in connection with a management performance bonus, you are welcome at any time to request assistance through Daeryun's 🔗Legal Consultation Booking page.
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