Electrical machinery and automobile manufacturing companies are moving away from the annual pay raise system in a bid to reinforce performance-based pay and rein in payrolls.

Analysts said result-oriented pay already accounts for 60 percent of salary systems at leading electrical machinery makers and about half of the wage systems at automakers.

They said an era of severe pay cuts may ensue if the economy fails to overcome deflation.

“When an employee aged 34 becomes 35, he will not be able to catch up with the wage of an employee aged 35 in the previous year once a new wage system is introduced,” Takahiko Okada, an executive at Fujitsu Ltd., said recently in an informal session with reporters.

Okada said Fujitsu will propose reducing the range of increase in basic pay — corresponding to a regular annual salary hike — in the annual negotiations with the company union in the spring.

The proposal effectively means a wage cut.

Until now, annual pay raises have averaged about 2 percent a year.

For a male employee at a big electrical machinery maker earning 7 million yen a year, his pay will fall by slightly more than 2,000 yen a month from the year before if the rate of increase is halved.

Okada said that in practical terms, the cut won’t have much of a negative impact. The amount of take-home pay will not be slashed and workers won’t feel it in the wallet compared with cuts in bonuses and the abolition of various allowances.

But a reduction in the disposable income of salary earners is seen by some experts as inevitable. For example, although people’s housing loan burden will remain the same, the government has revised the tax system for fiscal 2003 and abolished the special spouse tax deduction, amounting to a maximum of 380,000 yen.

Starting in April, salaried workers will also have to pay 30 percent of their medical costs, up 10 percentage points from the present rate.

Satoshi Usami, managing director of Mitsubishi Electric Corp., predicted that double-income families will become the norm in Japan, as is seen in the United States and China.

Regular pay increases were automatic in the past and served to underscore seniority-based wages — the stronghold of unions hoping to prevent any suppression of salaries.

But spring wage negotiations of late have seen management calling for reductions and performance-based pay. And unions have reportedly generally accepted wage reductions.

Atsushi Uchida, secretary of Chubu Electric Power Co.’s union, said, “We have to cooperate in order to survive fierce competition.”

Many corporations are expected to respond on March 12 to union pay requests. The wisdom of both labor and management will be needed if they are to find a smooth way for a new system to replace the seniority-based pay system and lifetime employment.

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