Samsung Electronics' shift to equity-based compensation:
A meaningful transition for better alignment with shareholders
“While scale of new equity-based compensation is modest, it marks a significant first step towards adopting better aligned compensation structure”
"Given Samsung's influential position, this move may have ripple effect throughout Korean corporate sector”
On January 17th, Samsung Electronics announced a new compensation program internally to provide equity-based compensation to approximately 1,000 executives (with formal title of Managing Director and above). We believe this move is a landmark first step in addressing the previously raised concerns regarding the lack of alignment of interests among shareholders, the directors, and executive/employees.
Our Forum, in October 15th commentary titled "Three Actions for Samsung Electronics JY Lee and his team”, urged three key actions: 1) preparing for a transition to a professionally managed system similar to those of Apple and Microsoft, characterized by the alignment of management and responsibility and the absence of a controlling shareholder; 2) upgrading the board of directors and guaranteeing its independence; and 3) reforming the compensation program in line with global best practices. Recognizing the significant global demand for Samsung Electronics' top engineers and scientists, our Forum specifically urged the board of directors and management to promptly adopt equity-based compensation plans, such as Restricted Stock Units (RSUs), a form of equity compensation that grants employees ownership in the company over time and is widely used in Silicon Valley, to effectively address the potential loss of key talent to competitors.
The introduction of the equity-based compensation will not only help to revitalize the morale of Samsung Electronics' workforce but also establish a foundation for management that prioritizes the enhancement of shareholder value, thus overcoming the historically rigid "top-down management culture". However, it is important to recognize that this is just the first inning. The gap between Samsung and tech industry leaders such as Apple, NVIDIA, and TSMC has widened considerably, suggesting a long and challenging road ahead, and there are concerns about whether these measures will be sufficient to close that gap.
The announcement appears to have been handled with extreme confidentiality, with most top executives taken by surprise. Considering that executive compensation is a core function of the board of directors, the alleged exclusion of six outside, independent directors from this crucial decision-making process represents a serious breach of corporate governance principles, in our view. While the compensation plan is well-intentioned, it falls short in several key aspects. For top engineering talent, the relatively low nominal value of the stock grants, combined with attached conditions, is insufficient to serve as a strong motivator. The actual delivery of shares is deferred for one year. The provision that the number of shares can be reduced if the share price declines during the one-year period, is a point of contention. We do not support such conditions. There is a stark contrast between Samsung’s approach and the compensation plans commonly used in Silicon Valley, which are explicitly designed to boost morale and retain top talent. A crucial difference is, in Silicon Valley, while the total nominal value of long-term incentives may be reduced during industry downturn (which is common for cyclical sectors such as semiconductor), the lower share price results in a greater number of shares being granted. This serves as a powerful incentive for high-performing individuals to remain with the company for extended periods.
Last Friday, Samsung Electronics disclosed the 2025 OPI payout rates, which are largely determined based on the company's performance during the preceding year. This announcement included the information that a portion of the OPI bonus for executives would be paid in equity. It is widely understood that the OPI, an annual bonus paid at the beginning of the following year, represents the largest single bonus payout among the various incentive programs offered. The incentive payout, capped at 20% of “excess profit”(above an internal target), can reach up to 50% of an individual's annual base salary. This year, the actual payout rates have been set between 9% and 44% of annual base salary, varying by business division. The new program stipulates that MDs must receive at least 50% of their performance bonus in equity, EVPs at least 70%, Presidents at least 80%, and registered directors, including the CEO, must receive 100%. These shares are subject to a lock-up period, restricting sale for one year for MPs and EVPs, and for two years for CEOs. Furthermore, it is understood that from 2026 onwards, general employees will have the option to participate in the equity compensation program on a voluntary basis.
Samsung Electronics has embarked on its journey towards adopting a more globally competitive compensation structure. Japan has made good progress. A notable example is Toshiaki Higashihara, the CEO of Hitachi, who holds own shares valued at around $8.2million. Hitachi's successful restructuring efforts have resulted in a remarkable 307% surge in its share price over the last five years, establishing it as a prime illustration of a win-win outcome for both shareholders and executives. Samsung Electronics' 2024 semi-annual report indicates that the four inside directors of the board hold an average of W880 million (equivalent to US$600,000) in equity. Local media Invest Chosun reports that among the 18 executives in the Business Support Task Force (TF), which serves as the Samsung Group's powerful control tower 13, including TF leader Vice Chairman Chung Hyun-Ho, do not own any company shares. We hope that Samsung Electronics can cultivate an "equity culture" similar to that found at Apple, NVIDIA, Alphabet, and Amazon, where employees can share the financial upside and have the opportunity to build wealth alongside the company's growth.
Given the constant allure of Silicon Valley for Samsung Electronics' top-tier (“S-level and A-level”) engineers, the current levels of both total compensation and equity-based rewards are inadequate, in our view. If the company were to grant 1,000 or so executives an average of W300 million (or US$200,000) in equity rewards this year, the total cost would stand between W200 billion and 400 billion (or US$140million~280million). In contrast, Meta, with a significantly smaller workforce, distributed more than US$11 billion worth of RSUs or equivalents to its executives and employees in 2022.
We urge Samsung Electronics to shift towards a compensation model where the majority of long-term incentives for executives and key talents are provided in the form of equity rewards. It is highly probable that Samsung Electronics' top engineers, who have friends and former colleagues at NVIDIA, Apple, Amazon and Tesla must feel that their contributions are not being adequately recognized financially.
Samsung Electronics must prioritize its tech workforce such as engineers, scientists, and designers to effectively overcome its current challenges. This prioritization should begin at the point of recruitment, starting with higher salaries, faster promotion tracks, and greater career opportunities compared to business personnel (including business support, sales, and marketing etc). To facilitate this shift and boost morale of engineers, Samsung Electronics should consider significantly downsizing its administrative and support functions, such as the Business Support TF, Management Support, Legal, Communications, and Corporate Relations departments.
January 20, 2025
Korean Corporate Governance Forum
Chairman,
Namuh Rhee
Samsung Electronics' shift to equity-based compensation:
A meaningful transition for better alignment with shareholders
“While scale of new equity-based compensation is modest, it marks a significant first step towards adopting better aligned compensation structure”
"Given Samsung's influential position, this move may have ripple effect throughout Korean corporate sector”
On January 17th, Samsung Electronics announced a new compensation program internally to provide equity-based compensation to approximately 1,000 executives (with formal title of Managing Director and above). We believe this move is a landmark first step in addressing the previously raised concerns regarding the lack of alignment of interests among shareholders, the directors, and executive/employees.
Our Forum, in October 15th commentary titled "Three Actions for Samsung Electronics JY Lee and his team”, urged three key actions: 1) preparing for a transition to a professionally managed system similar to those of Apple and Microsoft, characterized by the alignment of management and responsibility and the absence of a controlling shareholder; 2) upgrading the board of directors and guaranteeing its independence; and 3) reforming the compensation program in line with global best practices. Recognizing the significant global demand for Samsung Electronics' top engineers and scientists, our Forum specifically urged the board of directors and management to promptly adopt equity-based compensation plans, such as Restricted Stock Units (RSUs), a form of equity compensation that grants employees ownership in the company over time and is widely used in Silicon Valley, to effectively address the potential loss of key talent to competitors.
The introduction of the equity-based compensation will not only help to revitalize the morale of Samsung Electronics' workforce but also establish a foundation for management that prioritizes the enhancement of shareholder value, thus overcoming the historically rigid "top-down management culture". However, it is important to recognize that this is just the first inning. The gap between Samsung and tech industry leaders such as Apple, NVIDIA, and TSMC has widened considerably, suggesting a long and challenging road ahead, and there are concerns about whether these measures will be sufficient to close that gap.
The announcement appears to have been handled with extreme confidentiality, with most top executives taken by surprise. Considering that executive compensation is a core function of the board of directors, the alleged exclusion of six outside, independent directors from this crucial decision-making process represents a serious breach of corporate governance principles, in our view. While the compensation plan is well-intentioned, it falls short in several key aspects. For top engineering talent, the relatively low nominal value of the stock grants, combined with attached conditions, is insufficient to serve as a strong motivator. The actual delivery of shares is deferred for one year. The provision that the number of shares can be reduced if the share price declines during the one-year period, is a point of contention. We do not support such conditions. There is a stark contrast between Samsung’s approach and the compensation plans commonly used in Silicon Valley, which are explicitly designed to boost morale and retain top talent. A crucial difference is, in Silicon Valley, while the total nominal value of long-term incentives may be reduced during industry downturn (which is common for cyclical sectors such as semiconductor), the lower share price results in a greater number of shares being granted. This serves as a powerful incentive for high-performing individuals to remain with the company for extended periods.
Last Friday, Samsung Electronics disclosed the 2025 OPI payout rates, which are largely determined based on the company's performance during the preceding year. This announcement included the information that a portion of the OPI bonus for executives would be paid in equity. It is widely understood that the OPI, an annual bonus paid at the beginning of the following year, represents the largest single bonus payout among the various incentive programs offered. The incentive payout, capped at 20% of “excess profit”(above an internal target), can reach up to 50% of an individual's annual base salary. This year, the actual payout rates have been set between 9% and 44% of annual base salary, varying by business division. The new program stipulates that MDs must receive at least 50% of their performance bonus in equity, EVPs at least 70%, Presidents at least 80%, and registered directors, including the CEO, must receive 100%. These shares are subject to a lock-up period, restricting sale for one year for MPs and EVPs, and for two years for CEOs. Furthermore, it is understood that from 2026 onwards, general employees will have the option to participate in the equity compensation program on a voluntary basis.
Samsung Electronics has embarked on its journey towards adopting a more globally competitive compensation structure. Japan has made good progress. A notable example is Toshiaki Higashihara, the CEO of Hitachi, who holds own shares valued at around $8.2million. Hitachi's successful restructuring efforts have resulted in a remarkable 307% surge in its share price over the last five years, establishing it as a prime illustration of a win-win outcome for both shareholders and executives. Samsung Electronics' 2024 semi-annual report indicates that the four inside directors of the board hold an average of W880 million (equivalent to US$600,000) in equity. Local media Invest Chosun reports that among the 18 executives in the Business Support Task Force (TF), which serves as the Samsung Group's powerful control tower 13, including TF leader Vice Chairman Chung Hyun-Ho, do not own any company shares. We hope that Samsung Electronics can cultivate an "equity culture" similar to that found at Apple, NVIDIA, Alphabet, and Amazon, where employees can share the financial upside and have the opportunity to build wealth alongside the company's growth.
Given the constant allure of Silicon Valley for Samsung Electronics' top-tier (“S-level and A-level”) engineers, the current levels of both total compensation and equity-based rewards are inadequate, in our view. If the company were to grant 1,000 or so executives an average of W300 million (or US$200,000) in equity rewards this year, the total cost would stand between W200 billion and 400 billion (or US$140million~280million). In contrast, Meta, with a significantly smaller workforce, distributed more than US$11 billion worth of RSUs or equivalents to its executives and employees in 2022.
We urge Samsung Electronics to shift towards a compensation model where the majority of long-term incentives for executives and key talents are provided in the form of equity rewards. It is highly probable that Samsung Electronics' top engineers, who have friends and former colleagues at NVIDIA, Apple, Amazon and Tesla must feel that their contributions are not being adequately recognized financially.
Samsung Electronics must prioritize its tech workforce such as engineers, scientists, and designers to effectively overcome its current challenges. This prioritization should begin at the point of recruitment, starting with higher salaries, faster promotion tracks, and greater career opportunities compared to business personnel (including business support, sales, and marketing etc). To facilitate this shift and boost morale of engineers, Samsung Electronics should consider significantly downsizing its administrative and support functions, such as the Business Support TF, Management Support, Legal, Communications, and Corporate Relations departments.
January 20, 2025
Korean Corporate Governance Forum
Chairman,
Namuh Rhee