It is noted that the excessive performance bonus system of securities companies caused the real estate PF bubble. The Financial Supervisory Service announced on the 30th, “It has been confirmed that a significant number of securities companies have breached the relevant corporate governance laws in the process of paying performance fees relating to real estate PF.” /News 1
The 90 billion won residential-commercial building construction project that Hi Investment & Securities is pursuing in Ulsan from February 2022 is in danger of being stuck. The land was seized in October last year because the developer did not pay local taxes, and there is still no sign of it being resolved. Hi Investment & Securities, as the financial manager, invested 5 billion won in this project. The apartment project that this securities company is promoting through PF (project financing) in Gyeongju, Gyeongbuk from December 2021 was also canceled last year due to lack of permission. The entire investment amount of 2 billion won was written off as a loss.
All of these businesses were in the form of real estate PF (project financing), which raised funds without collateral based solely on the feasibility of a real estate business. Kim, the former president of investment finance who led these businesses, was promoted from vice president to president at the end of 2020, and earned an annual salary of 6.6 billion earned in early 2022. However, from 2022, interest rates loan has risen due to the increase in the interest rate in the United States, and the real estate market has also fallen into recession. This securities company’s exposure to real estate PF loans (below notice) increased almost seven times from 43.5 billion won at the end of 2021 to 275.1 billion won at the end of September last year. Former CEO Kim was eventually fired from his position in November last year.
It is noted that the excessive performance bonus system of company securities has had a significant influence causing the real estate PF bubble. During this process, many breaches of the law were discovered. The Financial Supervisory Service announced on the 30th, “It has been confirmed that a significant number of securities companies have breached the relevant corporate governance laws in the process of paying performance fees relating to real estate PF.” This is a result of the Financial Supervision Service’s inspection of the performance of real estate PF fee payments from 17 securities companies since November last year.
Graphics = Kim Seong-gyu
◇ PF insolvency rises amid performance bonus banquets in securities firms
According to the Financial Services Commission, the delinquency rate of real estate loans PF securities companies at the end of September last year reached 14%. Real estate PF loan delinquency rate for insurance companies was around 1%, and for mutual finance and savings banks like Nonghyup and Saemaeul Geumgo, it was around 4-5%. This means that the PF business led by securities companies is seriously insolvent.
However, securities company employees have already received generous performance bonuses. In the cases found by the Financial Supervisory Service, performance fees were supposed to be distributed over a number of years, but in many cases, they were given all at once or distributed in a period and manner that did not meet with the standards. Due to the nature of the PF project, which runs for 3 to 4 years, if the project goes wrong in the middle, the compensation of the PF managers must be reduced, so by law, there is more than a certain percentage (40%) o the performance bonus must be distributed over at least 3 years (deferred payment). However, some companies paid performance fee guarantees of 2 billion and earned 1.3 billion in lump sum to PF workers.
Securities companies set fees based on factors such as whether their own money is invested in the PF business and how risky the business is. Performance bonuses are awarded based on this fee. An executive at a securities company said, “When the real estate market was good, small and medium-sized securities companies often paid large performance bonuses to their employees and participated as junior creditors in real estate PF projects because they make a lot of money without them. going bankrupt although it’s a bit risky.”
◇ The company pays attention to concerns about the departure of employees
There is a view that employee performance compensation should be actively linked to PF project outcomes, but this doesn’t really work well. The CEO of a financial investment company said, “If we change the system to pay compensation based on PF business results, employees will move to competitors, and companies will only pay attention to their employees.”
According to data received by Democratic Party lawmaker Lee Yong-woo’s office from nine major securities firms, each real estate PF employee was paid a performance fee of 285 million in 2021. Korea Investment & Securities and Meritz Securities earned the most at 680 million won and 490 million won, respectively. In 2022, 159 million earned per person was spent. Meritz Securities was the biggest with 370 million won. However, the average reimbursement per person of the nine warranty companies due to poor business was only 1.8 million won and 2.6 million won in 2021 and 2022, respectively.
An official from the financial authorities said, “This practice in the securities industry has led to a focus on high-risk, high-return areas such as real estate PF.” The Financial Supervisory Service intends to hold the company fully responsible for the offenses identified this time.
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