YEAR BY YEAR:
Japanese Companies Switching to Annual Salaries

July 4, 1997

In rapidly increasing numbers, Japanese companies are switching to a system of annual salaries with pay scales based on workers' yearly performance. This sort of wage system is the norm in Europe and the United States, but was not widely adopted in Japan until the speculative bubbles collapsed in the early 1990s, prompting corporate restructuring along with a trend toward weighting employees' skills and records more heavily. At present the typical annual-salary system in Japan ties less of the employees' salaries to the assessment of their performance than the U.S.-style system; it remains to be seen whether a more full-scale performance-based system will develop in Japan.

Higher Performance, Lower Personnel Costs
The system traditionally employed by most Japanese companies tied annual wage increases to employees' ages and number of years spent working for the firm. Under the annual-salary system now beginning to supplant this seniority-based scheme, however, paychecks are pegged to workers' ability and performance instead. The history of performance-based salaries in Japan is short; they were said to have been used first in 1969 when a major electronics firm introduced them for its managerial ranks.

But the number of companies paying performance-based wages has been skyrocketing over the few years since the bubble economy met its end. A 1995 Ministry of Labor survey of 5,300 firms throughout Japan revealed that 4.3% of the total, and 7.9% of the firms with over 1,000 employees, used a performance-based wage system. Another private survey carried out the same year indicted that 15.3% of all large firms had introduced an annual-salary system--a marked rise from the 11.6% figure obtained from the same survey in 1993. In another survey of 510 listed companies, fully 68.2% of the firms not yet using an annual salary system were discussing or actively planning its introduction. Performance-based annual wages seem set to win over an ever bigger share of the Japanese corporate world in the near future.

The conditions facing the companies are doing more than anything else to bring them into the annual-salary camp. The employment environment is undergoing great change: As part of their restructuring after the speculative bubbles collapsed, many firms adopted such practices as year-round hiring. Amid all this is a rising management trend toward focusing on the productivity and ability of the employees in order to control personnel spending.

This managerial stance is discernible in a broad range of survey results. One private-sector survey carried out in May of last year asked 50 listed companies the reasons they had adopted performance-based pay scales. Topping the list was "to evaluate more clearly employee performance," which was given as a reason by 71% of the firms; this was followed by "to reinvigorate the company" (39%); "to shore up our goals-oriented managerial system" (37%); "to increase employees' sense of contributing to company operation" (31%); "as a stimulus to boost productivity" (27%); and "to shift the firm to a person-by-person wage system" (also 27%).

A Kinder, Gentler System
The annual salary systems adopted by Japanese companies feature much less stringent performance assessments than similar systems in the West. In general, college graduates in the United States who put their degrees to work when hired are, after a fixed trial period, placed in a managerial or specialized position and paid an annual salary. The guaranteed yearly wages are paid out monthly and a bonus tied to performance is awarded at the end of the fiscal year. The entire sum of the bonus is subject to assessment; the amount can vary widely depending on company performance and employee evaluations, and there are cases where bonuses are not awarded at all.

Japanese versions of the annual-salary system differ somewhat from this. In the most common form of the scheme, employees are paid salaries tied to their positions, intended in part to safeguard their livelihoods, as well as performance-based payments much like bonuses. Their annual salaries are paid in monthly installments and bonuses paid out at fixed times during the year. The form seen at many Japanese companies diverges from the U.S. model in that only a portion of the bonus amount hinges on performance assessments.

A personnel director at one electronics manufacturer that has been paying annual salaries to its managerial employees since 1993 stresses that "Japanese firms are unlikely to take to a system with overly large fluctuations in the amount paid." Another personnel director at an advertising agency that has introduced annual salaries for all employees states, "the system provides for reduced payments based on negative assessments, but this is rarely seen. This doesn't mean that highly positive assessments are heavily relied upon, though--most employees receive decent grades. The system as a whole is rather loosely applied. It's a Japanese-style performance-based system, really."

But the wage systems used by U.S. companies, which continue to grow more strongly pegged to individual ability, are rapidly becoming an international norm. There are many economists who predict that the Japanese version of the annual-salary system will sooner or later become more of a full-fledged performance-based scheme like those seen in the West.

Ministry of Foreign Affairs

Japan Information Network