[Column] Reconsidering a profit-sharing system

If large companies' profits can be shared with their small counterparts, it could also serve as compensation.

Chung Un-chan

The author, a former prime minister and former president of Seoul National University, is the chairman of the Korea Institute for Shared Growth.

A meaningful change recently was noticed in Korea’s shipbuilding sector. Five major shipbuilders, their contractors, expert groups and the central and local governments launched a cooperative body for symbiotic growth of the industry and hammered out an agreement to improve the dual labor market. The five shipbuilders pledged to reflect price changes when they pay for components supplied by their contractors. They also plan to employ an “achievement-sharing system” with contractors to help cut their production costs and enhance the quality of products.

That’s not all. The central government vowed to create a shipbuilding ecosystem for symbiotic growth by helping narrow the wage gap between contractors and subcontractors, establish a wage system based on the level of skills instead of seniority and prevent late wage payments prevalent in the shipbuilding industry.

Their joint action was unavoidable. As the shipbuilding industry could not effectively ride a boom from 2022 after the 2014-2021 slump due to worsened segmentation of labor in the sector, the stakeholders had to take action.

That’s a welcome development that hopefully will spread to other industries. Over a decade has passed since symbiotic growth became a buzzword. But reflecting price changes in fixing prices of supplied parts or sharing large companies’ achievements is not a norm yet. I hope big companies go beyond the achievement-sharing system and boldly adopt a profit-sharing system soon because the second is more promising.

The Biden administration demands foreign chipmakers share some of their excess profits with the U.S. government in return for subsidies for their investments in America. Korean media outlets immediately criticized the United States — the champion of market capitalism — for going against the principle. In fact, such attacks are naïve. As presidential candidates, both Hillary Clinton and Bernie Sanders pledged to introduce a profit-sharing system to all American industries, if elected. Profit sharing is simply a matter of negotiation, not a subject for denial.

I have been advocating for an excess profit-sharing system since 2011 as part of a short-term policy for symbiotic growth. The system aims to divert some surplus profits from a company to its contractors to promote their technology development, overseas business expansion and employment security. Just like large companies dole out hefty bonuses to their executives when they earned excess profits, they can share their profits with contractors. That will help create a mutually-beneficial business habitat to help ease the chronic low growth and polarization our economy faces.

After the profit-sharing system was introduced to the U.S. film industry in the 1920s, it provided a fertile ground for Hollywood movies to gain global competitiveness. A novel system that offered excess profits to directors, actors, actresses and production staffers on top of their running guarantee also contributed to the remarkable advancement of our film industry after it was implemented here.

Some adopt revenue sharing instead of profit sharing. The National Football League has been evenly distributing its revenues to all its members since 1970 to address a widening wealth gap among them by collecting all income from selling TV broadcast rights and managing copyrights of their all commercialized goods. As a result, all 32 teams were able to have a stable income and show more energetic games for their fans. Various types of profit-sharing or revenue-sharing systems are being used in Britain, Australia and New Zealand, too.

For the Korean economy to rebound, investment must increase. But companies, large or small, are lacking in investment. While large companies have trouble finding their investment targets even with much money, small and midsize companies want to invest but do not have enough money. If large companies’ money can flow to their small counterparts, it can help increase their investment, production and employment, which will eventually ease our recession and pave the way for long-term growth. As SMEs make up 99 percent of all companies in Korea and account for 83 percent of all employees, profit sharing can help ease polarization too. If Korea had adopted a profit-sharing system earlier, it would have elevated our growth rate considerably and alleviated the polarization noticeably.

Large companies in Korea could rake in profits partly thanks to their unfair trade deals with their contractors. If their profits can be shared with their counterparts, it could also serve as compensation.

Translation by the Korea JoongAng Daily staff.