Reviewing seniority-based pay

While most Japanese firms still maintain a seniority-based wage system, several major electronics makers are beginning to offer high-level rewards to employees in technology and research jobs still early in their career as a way to recruit competent workers. To survive the global competition in artificial intelligence and other advanced fields, they need to secure talented manpower from around the world capable of creating innovative products and breakthrough technology. Behind the budding move is a sense of crisis that as long as these companies remain tied to their seniority pay system, they will lose out to overseas rivals that attract excellent talent with hefty compensation.

NEC Corp. says its decision to introduce a new wage system in October was prompted by the necessity to change the wage and promotion system to compete globally. Under the new system, a newly hired employee fresh out of school may get more than ¥10 million in annual pay. Instead of placing a uniform cap on the wages of first-year employees who wrote highly acclaimed research papers as students, the company will determine their compensation levels based on their research performance.

Sony Corp. has begun a new system that offers up to ¥7.3 million in compensation a year to a freshman employee who completed a master’s course and has expert knowledge in such digital fields as AI or big data. Earlier, the maximum annual pay for such an employee at the firm was ¥6 million. Wages for first-year employees will be raised if they exhibit excellent performance in the first three months after joining the company. Sony hopes the measure will make the firm more competitive in recruiting manpower with expertise in digital fields as demand grows for such workers in a wide variety of sectors, ranging from automakers to finance.

Fujitsu Ltd. also reportedly plans to reform its wage system into one that may offer tens of millions of yen a year to workers with expertise in digital fields in accordance with the level of their expertise and market value, irrespective of their age or career. The company plans to overhaul its wage and promotion system by the end of the year to abolish the seniority-based portion of workers’ pay and decide their remuneration according to what they do on the job. The system will be applied to all employees of the firm, not just those in technology and research jobs.

Some firms are considering such measures not only to become more competitive in hiring talented young workers, but as a defense against their own engineers and research workers being head-hunted by other firms offering better wages and conditions. The competition to recruit excellent manpower with expertise in digital fields in mid-career is also said to have gone global.

Under Japan’s prevalent labor practices such as mass hiring of fresh graduates, seniority-based wages and promotion, and lifetime (or long-term) employment, emphasis has tended to be placed on teamwork in getting the job done over recognizing the performance of individual employees. That has not changed much even as the speed of technological innovation becomes much faster today and ideas and contributions of individual workers make a big difference in the company’s performance.

Many Japanese high-tech companies that need to develop innovative technology to win the intensifying competition still use seniority-based wages. Some have partially introduced performance-based remuneration, but the seniority-based portion continued to account for a major part of their workers’ wages, and their attempts at wage system reforms reportedly did not function as intended.

As global competition to secure excellent manpower across national borders tightens, businesses need to shift to a wage system that properly rewards individual employees for their expertise and performance, which should in turn enable workers to give full play to their potential. As long as highly educated people who finished graduate school education and have a measure of expertise in their field are not compensated in accordance with their capabilities, prospects are dim for Japanese companies to produce the kind of innovations that drive their competition with rivals worldwide.

This year’s edition of the government’s economic and fiscal white paper cited a concern that conventional employment practices at Japanese firms could hamper their responses to technological progress. Companies in other sectors need to follow the big high-tech firms in reviewing the seniority-based wage system.