Corporate Japan's shift toward performance-based pay has been beset by difficulties.

Many employees used to the traditional seniority-based system claim performance assessments are unfair, while some employers feel workers tend to set themselves easy job targets in order to earn better evaluations.

Yet Koichi Yanashita, a former personnel chief and managing director of Takeda Chemical Industries Ltd., does not take a pessimistic view.

Problems can be avoided via thorough discussions between managers and subordinates on job results and through the setting of concrete targets, he said in an interview.

"A boss and a subordinate need to discuss what they regard as results and to share the image of their goal," Yanashita said. "At the end of the year, they make sure how the goal and the result are different."

Yanashita played a key role when Japan's largest pharmaceutical firm launched its new salary system in 1997. He currently works as an independent consultant specializing in personnel affairs.

He said that Japanese companies should adopt a merit-based pay system, not as a means of cost-cutting but as a strategic tool to gain a competitive edge.

"The merit-based salary system is an important means to achieve goals set by the company's top management, not just a way to change wages," he claimed.

Since the 1990s, when the economy stagnated after the bubble burst, an increasing number of Japanese companies have been shrinking or abolishing seniority-based pay and adopting merit-based pay.

These firms are using the new arrangement to boost worker motivation and to distribute limited funds more effectively.

Takeda Chemical adopted merit-based pay as part of a management plan to boost innovation and make the firm more globally competitive.

"Employees came to recognize their role toward achieving the company's target," Yanashita said.

Setting appropriate performance targets is the key to success, he said.

"Managers should give subordinates tasks that are in line with the section target to achieve the company goal."

The company's merit-based pay was designed differently for different types of jobs.

Sales and research workers, for example, are evaluated in terms of performance and competency, which involves factors such as teamwork and the education of subordinates.

The performance and competency of each worker is rated on a five-level scale, from S to D. The score is reflected in an annual pay rise within the wage range of the grade to which the worker belongs, regardless of age or length of service in the company, Yanashita explained.

For example, if a worker attains grade S, signifying extraordinarily high performance, the worker's salary rises four steps in a range of 40.

A D rank meanwhile means no pay rise. The salary in the initial set of 40 steps ranges from 180,000 yen to 300,000 yen.

A different assessment regime was designed for clerical and technical workers. Given the nature of their work, they are not required to discuss targets with their bosses, according to Yanashita.

Seniority-based salaries were partially maintained until 2003 and were then abolished.

Yanashita admitted the company's system was not perfect and has been revised since being introduced.

In a questionnaire conducted by the firm's labor union in 2001, 71 percent of sales staff and 63 percent of research workers supported the new system, Yanashita said.

On the other hand, only 46 percent of clerical workers and 25 percent of technical workers were supportive.

Some workers questioned the value of spending so much time filling precise assessment forms and having interviews with their bosses every year, as the nature of their job does not change much, Yanashita said.

According to Masashi Sugimoto, the union's chief, the assessment forms for clerical and technical workers were simplified and the evaluation standards were also improved when the system was revised in 2003.

Yanashita is critical of companies that try to introduce merit-based pay with the sole aim of reducing personnel costs.

At Takeda Chemical, personnel costs actually rose for three years after merit-based pay was introduced, he said.

Yanashita said shifting to performance-based pay is a must for Japanese companies. "The era of seniority-based pay is over," he said.

Young workers cannot wait for years before their salaries are raised and tend to move to other companies in pursuit of better wages, he noted.