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"Surely it is natural for the CEO to set executive pay?" We hear this often in practice. The short answer, however, is no. Korea's Commercial Act allows director remuneration to be fixed only by the articles of incorporation or a shareholders' resolution, and pay granted in breach of that rule can lead to a situation where the money must be returned to the company. Below we explain who must set director pay and how, and what your company should be checking now.

[Table of Contents]

1. Why the CEO cannot set director pay alone — Commercial Act Article 388

2. What happens on breach — repayment of remuneration received

3. Who sets individual executive pay — the roles of the general meeting and the board

4. The Supreme Court's recent view — why delegating to the CEO is problematic

5. What to check now — the articles and the executive remuneration rules

6. A safe design — board resolutions and a remuneration committee

Why the CEO cannot set director pay alone — Commercial Act Article 388

Article 388 of the Commercial Act is a mandatory provision requiring director remuneration to be fixed by the articles of incorporation or a shareholders' resolution. It cannot be excluded or varied at will. The reason is clear: if directors set their own pay, the interests of the company and its shareholders may be harmed. To prevent a structure in which the person receiving the pay is also the person setting it, the Act vests that authority in the articles or the general meeting of shareholders.

What happens on breach — repayment of remuneration received

If a CEO has arbitrarily set and paid the salaries of executives including himself, that payment may be assessed as lacking any legal basis. As a result, in the worst case the remuneration already received must be returned to the company. Note too that the problem often surfaces only later — during a management control dispute, a change in the governance structure, or when minority shareholders raise the issue — rather than while the executive is still in office.

Who sets individual executive pay — the roles of the general meeting and the board

Does this mean the general meeting must fix the salary of each individual executive? No. The structure widely used in practice and permitted is as follows.

1. The general meeting of shareholders sets the aggregate amount or ceiling of director remuneration.

2. Within that limit, the board of directors determines the individual amounts.

In other words, the key question is "what is delegated, and to whom." Where shareholders set the ceiling and only the allocation within it is left to the board, the arrangement does not run counter to the purpose of the Commercial Act.

The Supreme Court's recent view — why delegating to the CEO is problematic

Recently, however, the Supreme Court took the view that an arrangement allowing the CEO to fix the aggregate amount or ceiling of executive remuneration is difficult to permit. There are two reasons.

1. It effectively amounts to setting one's own pay. If the CEO controls the remuneration of the other directors, this is little different from determining his own remuneration as well.

2. It weakens the board's oversight function. Where a core interest such as pay is concentrated in the CEO, it becomes difficult for the board to hold the CEO in check.

Accordingly, the approach of "I am the CEO, so I decide executive pay too" should now be regarded as a structure carrying significant legal risk.

What to check now — the articles and the executive remuneration rules

Start by reviewing the articles of incorporation and the executive remuneration rules. Attention is needed in particular where the documents take the following form.

The articles state that "director remuneration shall be determined by resolution of the general meeting," yet the executive remuneration rules contain only wording to the effect that "the CEO shall determine executive remuneration." Where the two documents conflict, or a subordinate rule is structured so as to circumvent what the Commercial Act requires, that alone invites dispute.

A safe design — board resolutions and a remuneration committee

The allocation of individual remuneration should be structured to go through a board resolution or a remuneration committee rather than a decision by the CEO alone. Companies that have a remuneration committee centered on outside directors would do well to make active use of it. Clearly documenting who decides and by what procedure makes it far easier to defend the legitimacy of the remuneration if it is later challenged.

Cheongchul Law Firm is here to help

Director remuneration is not a question of amount but of the decision-making procedure. Cheongchul Law Firm advises across company law — from reviewing the articles and executive remuneration rules, to designing shareholder resolutions, restructuring how the board and remuneration committee operate, and responding to disputes over the repayment of remuneration. If you would like your executive pay decision structure reviewed, please contact Cheongchul Law Firm.

This post is provided for general legal information and does not constitute legal advice on any specific matter. The outcome of each case may vary depending on its specific facts, so please consult an attorney.