Korea to revamp public institutions’ financial performance metrics

[Courtesy of The Ministry of the Interior and Safety]

The South Korean government will revamp the way it evaluates financial performance metrics in public institutions, adding “current year performance” to the evaluation criteria for some indicators instead of scoring financial indicators solely based on “year-on-year improvement.”

According to sources on Sunday, the amendment to the “2024 Public Institution Management Evaluation Guidebook,” approved by the Ministry of Economy and Finance (MOEF) in October 2023, includes changes to the method of evaluating financial indicators in public institutions.

This is a change in the way each organization’s current year financial performance is applied to the 2024 evaluation. The MOEF’s plan is that half (50 percent) of the evaluation will be based on the relative evaluation from year to year, while the other half (50 percent) will be based on absolute evaluation results.

Until now, most financial indicators were scored based on how much improvement there was compared to the previous year. This created a structure where public institutions that were chronically in the red would receive a high financial score if the loss narrowed compared to the previous year. Conversely, institutions that had been profitable but saw a reduction in their profit margin would receive lower financial scores.

This change in the evaluation of financial indicators was intended to address this situation, according to the government. Public institutions have also reportedly pointed out that the existing method of scoring financial indicators undermines fairness.

The reforms, however, will only affect two financial metrics for now. The “relative evaluation 50 percent plus absolute evaluation 50 percent” method will be applied to operating margin and EBITDA (earnings before interest, taxes, depreciation, and amortization) as a percentage of sales. Depending on the results of their 2024 management evaluation, other financial indicators could also be amended moving forward.

The government explained that its approach of considering the current-year performance during evaluations could be applied to other types of indicators as well.

There is a high likelihood that the approach will be applied to safety indicators. Many institutions have spent excessive amounts of money to maintain their safety indicators at or above the previous year’s levels.

The updated guidebook also includes giving extra points to public institutions that utilize equipment from domestic medium-sized businesses, not just small and medium-sized enterprises, in their overseas business expansion.

It also contains information about ending score adjustments to account for the impact of the Covid-19 pandemic. The government has been reasonably adjusting the impact on relevant performance fluctuations since 2020, given the pandemic’s impact on organizations’ operating results.

With the updates to the guidebook, it is expected that there will be significant changes in the grades assigned to public institutions based on their total scores. A public enterprise official said, “The amendment will have a significant impact on our total score, as the weighting of financial indicators has increased significantly under the Yoon Suk Yeol administration.”

The Yoon administration also made a major revision to the evaluation system in October 2022, when it doubled the number of points for financial indicators in the management evaluation due to public organizations’ rapidly increasing debt.