Performance-related pay in Japan

Performance-related pay in Japan

Performance-related pay in Japan, where performance-related means personal performance related? Doing business in Japan in the 1980s it would have been impossible, but three decades later, given the changes in Japanese employee attitudes resulting from two decades of recession and deflation, it is now an achievable goal to have every employee in your company’s Japanese office earning on a pay for personal performance basis.

Let’s step back for a moment to understand how Japanese companies traditionally pay their employees. Most employees earn a ‘divide-by-18’ annual salary, with 1/18th paid on the 25th of each month and semi-annual summer and winter bonuses, each equal to 3/18ths salary, paid each June and December. Japanese call it ‘seniority-based pay’ because a company automatically increases an employee’s pay annually, and promotes the employee, depending on his or her years of service. With many Japanese joining a large company at 18 after graduating high-school, or at 22 after graduating university, then staying until retirement at 60, seniority-based pay traditionally made sense as part of Japan’s infamous ‘lifetime employment’ culture. Summer and winter bonuses became so prevalent that until the mid 2000s, Japan’s mandatory state employee health, pension and unemployment insurance system contribution rates were much less on summer and winter bonuses than on regular monthly salary. Also, many Japanese mortgages and long-term savings plans were, and often still are, structured with relatively low monthly payments and larger summer and winter payments to match employees’ receipt of bonuses.

The problem is that seniority-based pay, especially its seniority-based promotion aspect, is a disincentive to younger hardworking employees, and its very expensive as Japan’s workforce ages. Japan’s lifetime employment culture has also gradually eroded; by 2014, almost 50% of the workforce under 35 had worked for more than one employer. Erosion of lifetime employment amplifies the negative effect of seniority-based pay because younger workers want to rise more quickly in the management ranks and earning ability. So, starting in the late 1990s and accelerating throughout the 2000s and 2010s, many Japanese companies have used Japan’s never-ending economic recession and deflation, as excuses to gradually replace guaranteed summer and winter bonuses with bonuses linked in part to company performance. Some of these companies have also introduced Japan’s version of performance-related pay.

Performance-related pay in the Western world emphasizes personal performance, especially in the sales industry where salespeople often earn very aggressively geared pay with low guaranteed and high success percentages. In Japan however, performance-related pay means that instead of receiving guaranteed summer and winter bonuses, and pay raises as they add years of service, employees receive pay raises based on personal, team, and company performance. Even in the sales division, many Japanese companies do not differentiate salespeople’s pay scales from other employees’ pay scales, thus Japanese salespeople often earn the same seniority-based pay as do other employees who joined the company in the same year. In some companies, salespeople can earn commissions, but often such commissions relate to the sales team’s performance, not directly to a salesperson’s personal performance. Western sales organizations typically assign revenue quotas to regional offices, with salesperson’s salary dependent on his or her personal share of that quota. A Japanese company also assigns revenue quotas to regional offices, but each office then divides its quota among teams; few Japanese salespeople carry a personal quota.

It’s a major challenge to take a group of people accustomed to a traditional guaranteed wages system and persuade them to accept a system which, taken at face value, seems to cut their earnings. Doing so in a market such as Japan, where demand for bilingual people far exceeds demand, is an even bigger challenge. The answer is to start with your Japanese subsidiary President; his or her acceptance of a 70/30 or 60/40 base/performance pay package linked directly to the subsidiary’s revenue, sets an excellent example to the team. Be warned though: some older Japanese executives may respond “Sorry, you must guarantee my entire salary.”, “In Japan, it’s an insult to an executive’s honor and skill to suggest he work on a commission!”, or even “Of course I would love to, but my wife will object.”. What they really mean “If there’s no risk I’ll manage your subsidiary for you, but I’m not going to get emotionally engaged in ensuring its success and if it fails, I am going to walk away richer……even if you and your shareholders won’t!”. Does your company really need him or her?

Earlier, we noted that many Japanese companies pay their salespeople with low, or no, personal performance-related piece, probably an 85/15 base/commission split with the 15% linked to team performance. 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). Your company should put its subsidiary salespeople on similar commission plans, at least for base/commission split, as its head-office salespeople. Many successful Japanese salespeople, especially those in the 25 – 40 age group, will want to work for your company’s Japanese subsidiary, especially if it has a hot product or service, because they can earn higher commissions than if they were working for a traditional Japanese company. I suggest a 60/40 base/commission split with 50% of commission linked to personal performance and 50% linked to the subsidiary’s performance.

I suggest putting all other subsidiary employees, receptionist included, on 70/30 or 85/25 base/performance, with the performance piece linked solely to the subsidiary’s performance. In my experience, good Japanese employees react well to performance-related pay, 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.

Consider that for many of the subsidiary’s Japanese employees, this might be the first exposure to performance-related pay. To make this work, your company must set realistic revenue goals for its Japanese subsidiary, otherwise the only thing it will do is increase staff turnover. The aim is to use performance-related pay to reinforce both personal and team accountability, while reducing your company’s guaranteed business costs and rewarding people for working harder and smarter to reach higher revenues and profits. If your company successfully structures its Japanese employee salaries as recommended above, it will lower its subsidiary’s guaranteed salary cost by 30% or more, while giving employees the opportunity to gain financially from their efforts and especially from over-achievement. In doing so, it will probably double or treble its ability to succeed doing business in Japan!

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