On Strategically Sound Compensation in Japan

If Your Reaction is, “Yeah, I Agree, That’s Us,” You are One of the Luckier Foreign Capitalized Firms

  1. Your firm divides annual income by 16 or 20, for 4 to 8 months of summer and winter bonus. This means that up to 25% to 40% of pay is at risk. Although such bonus is generally paid, at our company on an exceptional basis, and to secure the resignation of a non-contributor, sometimes even no bonus is paid. (This is Japanese practice, not the aberration know to some foreign capitalized firms.)
  2. Given the same total pay, the more bonus the better. Non-pensionable pay components also keep our retirement benefit in line with other companies. We realize that people considering joining us do not know the details of our retirement benefit. Having a rich one gives us no strategic, competitive edge. We have a very large difference between what we are willing to pay at the fixed retirement age, and what is payable when someone voluntarily resigns or is terminated. This gets people to think twice about quitting, and is a sensible use of scarce resources. Employee turnover is reduced.
  3. In Japan it can be so difficult to terminate staff at a reasonable cost. We need specific policies that give us a strong legal position to flexibly reduce pay. Facing this, people will leave with a modest severance package. Our offer letters, Rules of Employment, and Salary System help us.
  4. As a company we have come to appreciate that selection (the people doing the work), quality of management, and the right corporate culture well communicated, are key to our success in Japan. We also know that strategically structured employment contracts, pay practices, and Rules of Employment play a critically defining role in attracting strong people, screening out weak people, and cultivating and rewarding winning behavior.
  5. We realized some time ago that if we believed the prevalent views of what is “legal or possible in Japan,” it would be too difficult (and not much fun) to run a successful business in Japan — “extra severance packages must be offered to everyone when reducing staff in Japan,” “pay levels cannot be reduced unless the person agrees in Japan,” “there can be no negative change in Japan,” or “you have to get the agreement of the union in Japan.”
  6. Attractive cash compensation — money in the pocket now has credibility. Today’s Japanese worker does not trust long-term paper promises. They want to keep it simple — cash under the futon. Even if you switch from your “Defined Benefit Retirement Plan” to the much-talked about “Defined Contribution Plan,” if your firm requires employees make a matching contribution, your firm will probably end up without a retirement benefit! (The new law effective from October 1, 2001, did not allow for matching contributions.)
  7. It is an unfair imposition on your Japanese management staff to expect them to drive changes that upset the status quo, and/or affect certain entitlements (including their own). It is easier, more effective, and more considerate to have the home office, and/or one-step-removed expat bosses drive change.