Doing business in Japan information
by Venture Japan
The nature of bonus payments and the typical absence of effective individual performance incentives, are two of the four main cultural differences (the other two differences are age-linked salaries and entertainment expenses) you will need to resolve if you want to control your Japanese subsidiary costs and, as Bruce C demands, '..scrape value from every penny..'. In my experience, cost control is the key (assuming you have a good product or service) to assuring your success doing business in Japan and if you are in a business where salaries are the major component of your domestic Japan business expenses (as is the case in the software industry), then you must get your subsidiary's salary expense tied to its revenue - that means having all your Japanese subsidiary employees on performance related pay.
In any culture, taking a group of people who have become accustomed to a traditional and ingrained set of employment conditions and trying to have them willingly accept conditions which, taken at face value, seem to potentially reduce their earnings is a major challenge. Doing business in Japan in the 1980s it would have been near impossible, but in 2004, given the changes in Japanese employee attitudes resulting from the recession (although not a severe recession compared to those of the US and Europe in the 1980s) of the 1990s, it should now be an achievable objective to have every employee in your Japanese office earning on a pay for performance basis.
Start with your Japanese subsidiary President. If he/she has real confidence and the ability to perform then he/she should be happy at the prospect of earning substantially more as a result of the subsidiary's over-achievement. I personally cannot imagine working on anything less geared than a 40% base + 60% commission structure and actually prefer a 30/70 split - any self-respecting subsidiary President should be similarly inclined. Be warned though that some senior Japanese will claim (as described in those myths of doing business in Japan!) that ";..I do not work for commissions.." or that "..in Japan it is an insult to an executive's honor and skill to work on a commission..". That's out-of-date prima donna talk - what it really means is "If you pay me a guaranteed fortune I will manage your subsidiary for you but I am not going to get emotionally engaged in ensuring its success and if it fails then I am going to walk await richer even if you and your shareholders will not!". There are OF COURSE a lot of prima donnas in the entertainment world but at least they they are prepared to share in the risk through royalty arrangements!!
A Japanese subsidiary President should set a strong example to the subsidiary employees by accepting at least a 60% base + 40% performance bonus package and preferably as aggressively structured as a 30% base + 70% performance bonus plus over-performance accelerators with the bonuses linked directly to the subsidiary's revenue. The latter (30/70) compensation package will set an excellent example for the rest of the subsidiary team but you will need to carefully structure against the corporate tax consequences of high directors' bonuses if your subsidiary is a kabushiki kaisha.
In the previous section I noted that many Japanese companies tend to pay their salespeople salaries with low (or no) performance related component. I have never paid a Japanese salesperson a 100% guaranteed salary (in fact I have never paid any Japanese subsidiary employee a 100% guaranteed salary!) and see no reason why your Japanese salespeople should not be on exactly the same commission plan (at least so far as base pay / commission ratio is concerned) as you use for your head-office salespeople. In 2004 many successful Japanese salespeople, especially those in the 25 - 40 age group, may be interested in working for your Japanese company (especially if you have a hot product or service) specifically because they can earn higher commissions than if they were working in a traditional Japanese company.
The level of commissions you can afford to pay your Japanese salespeople will of course depend on your local profit margins. In the software industry, where Japanese margins are high, I suggest a 60% base plus 40% performance bonus plus over-achievement accelerators. Japanese people do work together extremely well in teams and to encourage strong team performance I suggest that 50% of the bonus is related to individual performance and 50% to the subsidiary's performance.
All other subsidiary employees, receptionist included, should be on 70% base + 30% performance bonus with the bonus related solely to the subsidiary's performance. My experience is that many good Japanese employees react well to performance-related salaries, even at these aggressively structured ratios, maybe in part because it helps to emphasize the team aspect of the subsidiary and rewards employees as a team for good performance.
Remember that for many of your Japanese employees this may be the first exposure to performance related pay - especially at the aggressive ratios I am suggesting. To make this work you must set realistic revenue objectives for the Japanese subsidiary, otherwise the only thing you will achieve is high staff turnover. Your objective should be to use performance related salary to reinforce both individual and tram accountability while reducing your guaranteed business expenses (and thus your risk) and rewarding people for working harder and more intelligently to achieve greater revenues and profits.
If you successfully structure your Japanese salaries as recommended above, you will reduce the subsidiary's base (guaranteed) salary expense by 30% or more while giving employees the opportunity to benefit substantially from their efforts and especially from over-achievement. In doing so you will also double or treble your company's ability to truly succeed doing business in Japan.
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