Tech bonuses in South Korea have grown so large that the central bank is raising inflation fears

In a report released on June 17, the Bank of Korea (BOK) said inflation this year has mainly been driven by higher energy prices linked to the Iran conflict. However, it cautioned that even if those external pressures ease, inflation could continue to rise as incomes improve and wage growth spreads across the economy.

The central bank pointed in particular to unusually large performance bonuses being paid by major technology firms, saying they could eventually lead to broader wage increases and add to inflationary pressure.

South Korea is already dealing with inflation above the central bank’s target. The BOK expects inflation to average 2.7% this year, higher than its 2% goal.

Tech workers receive eye-popping payouts

The concerns come amid reports of enormous bonus payments at semiconductor giants Samsung Electronics and SK Hynix. Although the companies have not publicly disclosed the exact amounts being paid out this year, both firms have performance-linked bonus systems tied to profits.

Last September, SK Hynix reached a wage agreement that sets aside 10% of its operating profit for employee bonuses. Samsung employees also secured a deal under which 10.5% of the semiconductor division’s operating profit will be distributed as special bonuses for chip workers after union members threatened an 18-day strike in May.

According to a Reuters report citing an unidentified union source, a memory chip employee earning a base salary of 80 million won (about $52,400) could receive total bonuses worth around 626 million won ($410,000) this year.

Reuters calculations also suggest that SK Hynix employees could receive bonuses exceeding 700 million won ($454,851) if the company reaches annual profits of 250 trillion won this year.

Why the central bank is concerned

The Bank of Korea noted that performance bonuses do not usually have a major impact on inflation because they are one-time payments rather than permanent salary increases.

However, policymakers believe the current situation could be different because of the exceptional size of the payouts.

The central bank said that when “special bonuses expand unusually and substantially,” wage growth can spread to other sectors of the economy, creating stronger inflationary pressure from both the demand and supply sides.

“In particular, because recent IT-sector performance bonuses have been paid on a highly exceptional scale, the possibility that their actual impact could be larger than expected cannot be ruled out,” it added.

The concern is that workers receiving large payouts may increase spending significantly, while employees in other industries could demand similar compensation, pushing labour costs higher across the economy.

Retailers welcome the spending boom

Speaking at a press briefing on June 17, BOK Deputy Governor Lee Jiho said, “sales have increased significantly in places such as Suwon and luxury goods sections of department stores, and this could gradually spread further.”

South Korean media reports suggest that many technology workers have already begun spending their bonus windfalls on luxury products, including designer handbags, jewellery and high-end watches.

Spending rises around chipmaking hubs

The Bank of Korea said spending patterns have been particularly strong in Gyeonggi Province, where major semiconductor facilities operated by Samsung Electronics and SK Hynix are located.

According to the central bank, growth in card spending this year has been noticeably stronger in areas close to chip production sites and nearby residential districts than in other parts of the country.

Local newspaper Chosun Ilbo reported in May that luxury consumption has “rapidly increased” in southern parts of Gyeonggi Province, home to the headquarters and key operations of both semiconductor companies.

One Shinsegae department store branch in the province recorded a 53.6% increase in luxury goods sales compared with a year earlier, according to the newspaper. Luxury jewellery sales jumped 146.3%, while luxury watch sales rose 85.3%. Overall sales at the store increased 19% during the same period.

Retail stocks surge on luxury spending hopes

Investors have also taken notice of the growing spending power of South Korea’s semiconductor workers. Shares of major department-store operators have rallied sharply this year amid expectations that luxury consumption will continue to strengthen.

Lotte Shopping, the retail arm of the Lotte Group, has climbed more than 148% since the beginning of the year, including a 67% gain over the past three months.

Shares of Hyundai Department Store have risen 120% year-to-date, with more than doubling in value over the last three months.

Shinsegae has posted the strongest performance among the major retailers, with its stock soaring 190% this year. More than half of those gains have come recently, with the company’s shares rising 107% in the past three months alone.

Bonuses become an economic talking point

The scale of the payouts has turned corporate bonuses into an economic issue in South Korea. What would normally be viewed as a reward for strong company performance is now drawing attention from policymakers concerned about inflation, as well as from retailers and investors hoping the cash windfall translates into stronger consumer spending.