SEOUL (Reuters) - In a bid to curb rising domestic labor costs, Hyundai Motor Co is seeking to base wages on merit not seniority in an overhaul of a decades-old salary system that puts the South Korean firm on a collision course with its activist union.
South Korea is the world's fastest ageing major economy, and high labor costs are eroding its manufacturers' competitive edge as economic growth slows.
If Hyundai Motor, one of South Korea's biggest employers, succeeds in revamping its pay structure, other companies are likely to follow suit. That will accelerate a move away from a wage system still prevalent in South Korea and which is a legacy of years of heady economic growth and a culture that reveres seniority.
"Our wages have reached a critical limit as a manufacturing company," Hyundai Chief Executive Yoon Gap-han said in a letter to workers proposing the change, which was seen by Reuters. "I am concerned that Hyundai may face a situation where it is impossible to produce vehicles at domestic factories anymore."
Hyundai Motor is the flagship company of South Korea's second largest conglomerate, and one of its most influential. Its long-serving workers in Korea earn nearly twice as much as junior workers doing similar work, a company spokesman said, and overall, they are paid more than their colleagues elsewhere, including in the United States.
The restructuring proposal would not reduce current wages or result in immediate cost savings, the company said, declining to say how much savings it was targeting. Experts, however, said it would control future wage costs as workers age and the company's growth slows. The average age of Hyundai's unionized workers in South Korea is 45.5 years.
"But it will take an enormous time to reach an agreement," a Hyundai Motor executive said, declining to be identified due to the sensitivity of the issue.
Hyundai Motor employs 65,000 people in South Korea, most of them union members.
While more Korean companies are basing pay on merit, the majority still use a seniority based wage structure or a combination of both.
Among Hyundai's main Asian rivals, Japan's Nissan Motor Co introduced a performance-based pay system under CEO Carlos Ghosn, who has been at the helm since 1999.
Hyundai's union, which has gone on strike over wage talks during all but four of the last 27 years, has already rejected the wage proposal, setting the stage for what is likely to be an acrimonious round of annual pay negotiations this summer.
A union spokesman said it would only consider the proposal if the company agrees to include regular bonuses in base wages, a change management said would lead to even higher costs.
"The company will face strong headwinds should it not change its position," said union leader Lee Kyung-hoon.
Hyundai's seven factories in South Korea, five of which comprise the world's biggest car making complex in Ulsan, account for almost 40 percent of its total output. It also has plants in seven other countries including Brazil and China.
While the company does not disclose its labor costs by country, Daiwa Securities estimates the hourly labor cost at Hyundai's domestic factories was 24,778 won ($23) per worker in 2012, triple the 7,711 won for its China plants and above the 21,422 won average for its U.S. plant.
"Senior people have served the company for a long time so they deserve to get more," said a union painter who has worked at the automaker for five years and declined to be named because of the sensitivity of the matter.
Despite rising labor costs, Hyundai has never cut domestic production capacity. Doing so would sour relations with a government keen to maintain employment and exports. However, Hyundai and its sister company Kia Motors have not opened a new factory in South Korea since 1996.
"I don't see any signs that labor relations will stabilize this year," said Park Tae-ju, a former advisor to Hyundai and an expert on labor issues. "The wage proposal is just wishful thinking."
Additional reporting by Maki Shiraki and Chang-Ran Kim in TOKYO; Editing by Tony Munroe and Miral Fahmy