Samsung Electronics managed to avoid an eighteen-day strike by almost forty-eight thousand union workers in a dramatic last-minute effort to prevent the action, sending shockwaves of relief through South Korea’s financial markets. The agreement, which was worked out by the government’s mediators, has since put an end to the threatened strike and will now go to a formal vote, which is to be held May 22 to May 27. The news sent Samsung’s stock up almost eight percent, and the KOSPI index up just under three percent during morning trading, but there’s a twist to the announcement. In particular, the move to give bonuses to select employees of the memory chip company, valued at around four hundred sixteen thousand dollars for each worker, most of it in the form of stock, has been a source of what is mostly quiet but growing concern for investors and analysts alike.
The relief was palpable for those who’ve been closely following the negotiations over the last few weeks. Samsung is more than just another South Korean company, as it represents about 25% of South Korea’s total exports. A complete strike would have cascaded through the world’s supply chain for components, and it would have likely driven up the cost of virtually anything that uses a chip, such as data center servers, to smartphones. It’s why the union’s leader said he’s confident that rank-and-file members will approve the deal. The deal is a “hard fought compromise,” after months of frustration rising over pay and working conditions,” said one of the union leaders. The union’s initial proposals called for a more radical form of profit sharing, with 15 per cent of operating profit awarded to workers as bonuses. That number was cut down dramatically in the end.
Nonetheless, what came out of the negotiating table is anything but a win for the company. There were a few with a more balanced view, such as Ryu Young-ho, the top analyst with NH Investment & Securities. He said investors are “happily” the strike threat is gone, but it’s not a clear-cut victory for Samsung, as it commits the company to paying a lot more for labor over time. The good news however, is that these costs are organized. Instead of dumping a lot of money up-front, Samsung has agreed to issue the special bonuses primarily in company stock. This strategy not only reduces the up-front cost for the company’s balance sheet but also connects payroll incentives with the company’s stock performance.
It takes an ambitious and challenging approach to the details of the bonus structure. The union says that Samsung’s chip unit, which includes both memory and logic chip businesses, will allocate around 10 percent of operating profit for these special bonuses. However, it comes with a catch. The stock-based bonuses will be vested over at least a 10-year period, with the conditions for vesting being that the chip division’s annual operating profit is more than two hundred trillion won (roughly one hundred thirty-five billion dollars) between 2026 and 2028. The division still needs to make at least one hundred trillion won per year between 2029 and 2035 in order for the bonuses to keep coming. By no means are these small goals. They would demand Samsung to make a profit that is higher than its highest in the semiconductor business.
The bonus has been scaled to make it easier to comprehend: a typical memory chip worker makes a base salary of eighty million won a year. It is expected that that worker will get a bonus of roughly six hundred twenty-six million won this year, or about four hundred sixteen thousand dollars, per a union source who spoke on condition of anonymity because of the lack of publicity surrounding the issue. Almost all of that will come in the form of Samsung stock, not cash. This is a two-edged sword for the workers themselves. It’s an opportunity to make a lot of money if Samsung’s stock price rises over the next decade, however. However, the take home value is still dependent on the company’s market performance as well as the dynamics of the semiconductor cycle.
The deal is a complicated balancing act for Samsung’s management. Samsung Electronics’ chip marketing arm chief Jun Young-hyun issued an internal memo to employees, seen by Reuters, regarding the situation. In the letter, he implored his workers to “leave behind this time of conflict” and come together to build “the company’s global competitiveness and long-term growth.” A carefully-worded plea, recognising the acrimony of the argument and suggesting a way to focus on innovation and execution. But there is an inherent conflict under the surface. The big extra long-term billion-dollar winnings indicate that Samsung is setting the groundwork bar higher on labor costs in its most profitable business. This could strain margins, particularly if there is another period of chip market downturn, such as what occurred in the latter part of 2022 and 2023.
This situation is interesting because of the perception of the general public. With the themes of chaebol reform and income inequality constantly in the political spotlight in a country, there is bound to be mixed reactions when even individual workers are getting bonuses valued more than four hundred thousand dollars. Others will view it as a recompense for the long hours and high pressure semiconductor engineers endure in an intensely competitive global industry. Some would wonder if these hefty rewards are sustainable or justifiable, given what workers are paid in other parts of Samsung’s vast empire. Both lines of thought are not completely fallacious. The deal demonstrates that good collective bargaining can yield real benefits for workers, even in the presence of a large company that historically has been hostile to unions. It also leaves a number of unanswered questions regarding the long-term viability of such agreements, especially as chip supply chains grow increasingly challenging in terms of geopolitical threats and as the company’s growth stalls.
