Postwar economic development provided quite and immense amount of status and income to the Japanese. Since the 1960s, close to 90% of the Japanese people consider themselves to fall somewhere in the middle-class according to a survey conducted by the Prime Minister’s office. Today, status in society is determined mostly by one’s employment. Out of the labor force that consists of more than 60 million people, 45 million of those are regular employees. And for those who are working in a large firm, they are usually hired at the time of school graduation and retire at the compulsory age of 60.
This kind of long-term employment system makes employers feel that labor is more of a fixed cost than a variable cost. Regular employment is not determined by a legal contract, but more in the style of a social relationship, where performance in a by-product of the whole process and not a cause and effect of getting paid. In western societies, industrial identity is more focused on skill, or what one does, but in Japan it is where the employee belongs, or which company he works in is the main concern.
Performance is not the purpose or goal of the Japanese firm, instead it is a corporate reality in itself. The Japanese firm also exists in two levels, one which lies in the firm and one that lies outside the firm. Within the firm, the Japanese company tends to be a much more homogeneous group compared to its western counterpart. Large firms hire their workforce, mainly university graduates, from preferred schools to which they subtly assign quotas. These new recruits are hired for their potential. Training and development are essentially an internal affair which the firm is responsible for.
This would lead to a system of job rotation and on the job training which is further nurtured by the classic Japanese system between junior and senior (sempai-kohai) found ubiquitously in Japanese society. The firm invests heavily on training generalists, or company specific skills in the sense that any employee should adept all the skills needed for the task assigned to the group, and that the overall work organization be as flexible to allow innovation, maintain internal competition and promote participation. Outside of the firm, there is a vast network of banks and other companies that the Japanese firm is vigorously connected to.
This is commonly known as ‘Keiretsu’ or a type of inter-personal relationship amongst various levels of the business. The regular workforce is thus the main core of stakeholders, the stake being corporate survival and thus their own. Under the Japanese system which emphasizes lifetime employment as one of its unique traits, companies produce workers who have company specific skills This means that mergers and acquisitions are not much favored in Japan for the obvious reason that diverse corporate cultures are difficult to combine harmoniously.
The people working in a company that is being bought over has serious problems because his skills is not easily allocated in a different company even though it might be the case that they are in the same industry. Individual performance evaluation is a long-term basis and thus much less about short-term results and more about a steady improvement of one’s potential. This evaluation is made by numerous superiors who themselves at one time were the subordinates, assuming that both the appraiser and the appraised have and will work for quite some time.
Evaluation is for two related purposes, promotion and remuneration. It is then a complex task that can be handled neither by an individual superior nor on the basis of short-term considerations. It can only be handled over time and collectively. It is no accident that managerial experience with human resources is valued substantially higher in Japan than in the West. Japanese CEO’s regard experience in human resource very highly. Whereas other corporate functions can turn to numerical data to outline experience, experience of human resources is more of an art than just numbers.
This is especially true in Japan where human resources are not managed by the organization as a factor that is placed in and out of the labor market but are instead recruited for their potential and constantly upgraded through training and development. In Japanese companies, the major incentive for a worker is promotion from within, a competitive process reflecting the merit in years, otherwise known as ‘nenko’, namely the years spent in the enterprise and the accumulated experience of both corporate human and material resources.
Competition among peers is pretty severe. The above-average performer is promoted two or three years earlier than his peers. On the other hand, the below-average performer sees the pace of promotion slowing down and soon reaches the zenith of his career at section chief. As in general in Japanese society, authority over people tends to be looked at as a bad thing. The decision-making process in Japanese industry puts successful managers more in a role of coordinator who promotes communication and cooperation than supervisor who enforces rules and procedures.
Titles are valued more for their social prestige than for the formal authority they give. The purpose is to lengthen the hierarchical ladder and please more employees. Though often assumed to be traditional, the current system in Japan of employee performance evaluation and reward is a postwar innovation. In the years of rapid economic growth, it contributed to stable employment for a core of regular employees.
What was meant as a device to secure stability of employment under pressure from labor unions, turned out to be a basic factor making the Japanese enterprise a flexible learning institution by motivating employees to develop their careers through long-term association with the firm. “Regular” Employment in Japan Postwar Japan saw its population increase from 75 to 125 million while achieving respectable affluence, and its economy, though short on natural resources, reach the second in the world in terms of gross national product.
Favorable circumstances were indeed at work, but credit must go to the Japanese people too. Japanese human resources are thriving in an industrial environment where their high and uniform level of education supports a peculiar employment system described as lifetime employment. Though change is an age-old tradition in Japan, its increasing rapidity tends to upset the older generations, exhilarates the younger ones, and creates havoc in lifestyles. Changes are everywhere, in society as well as in the economy.
Given that Japan enjoys one of the longest life expectancies in the world, rapid aging of the Japanese population will combine with the prospect of severe labor shortage in the near future. This affluent society is promoting new values. In particular, young employees are starting to prefer present over future income, more free time over increased income and reward of capabilities over patient accumulation of experience. The economy is reaching maturity. The rapid evolution of technology demands creativity and knowledge of a more professional and immediate nature.
Growth in production is slowing down and the service sector is getting larger. Globalization of business and yen appreciation impose on Japanese firms new developments, such as international division of labor, shorter working hours, emergence of foreign labor and also mergers and acquisitions. Hence the lifetime employment system and the concomitant salary system were thought of by many as being out-of-date and that it is impossible to maintain, especially when the economy takes a downturn.
However, the fact that it has continued to function effectively as a stable system suggests that these arguments put forward in times of economic downturn mistook cyclical changes in economic fortunes for long-term structural changes. Postwar labor unions in their drive for stable employment popularized the radical concept of ‘no dismissal’. Dismissal, however, is not prohibited by the Japanese law. Employers have the right to terminate employment but in reality, they try their best not to do so.
Since ‘no dismissal’ is a part of the precepts of regular employment, the firm has to devise employment and compensation practices flexible enough to accommodate business fluctuations and use them with varying intensity. Besides the flexibility of the salary system itself, regular employment is kept flexible through various practices, in particular concerning working hours, part time and female employment, turnover of regular employees and personnel transfers. In order to constantly upgrade their core workforce and nurture information exchange, internal job rotation, at the rate of every two or three years, is common among regular employees.
A fairly common occurrence among manufacturers, in the case of a business slowdown, is to send for a time, managers, technicians and even production workers into the field to help with sales. In more serious cases, larger enterprises take advantage of their size to transfer regular employees permanently to other activities within the firm, which often leads to a new subsidiary. Transfer involves an employee resigning from the original company and being re-employed by another. Usually it starts with the employee being seconded and after a period of time, transferred.
In particular, the transfer of redundant personnel is considered socially as a better solution than unavoidable layoff. The postwar innovation referred to as lifetime employment is a norm that the Japanese industry has constantly adjusted to the changing circumstances in the economy and in society. The norm, even when and where it could not be applied in its full complexity, as was the case of most small firms and during bad times suffered by the larger ones, provided regular employees with their major work motivation and a congenial work environment.
It also allowed a steady upgrading of firm-specific human capital in the form of a core workforce composed of regular employees. Japan’s “Regular” Salaries In the early 1990s and in the context of the protracted recession that resulted from the economic bubble, observers of Japanese industry, once again, expressed discrepancy about the twin employment/salary system that has been the root of Japan’s postwar success.
Quite a number of critics visualize a fall of both the lifetime employment system and the seniority based salary system. The key characteristic of compensation under the lifetime employment system is its time dimension. For example, the average age of the regular workforce is most significant. It is a vital piece of information when comparing the business performance of Japanese companies. This is why firms are eager to hire new graduates who still have not earned their merits in years.
Because of the aging population at large, this average age has been increasing at an incredible rate of one year every five years and thus the average salary has increased quite an amount too. Indeed, this general aging process is one of the reasons why this seniority based salary system is losing its validity in recent years. Salary differentials are implicit in the starting salary, a notion used in reference to the recruiting of new school graduates. In the overall salary system, it would be the closest approximation of a market rate.
The competition to hire new school graduates remains keen among Japanese firms because they are the lowest paid in the system. The performance of the individual employee affects the basic salary by varying the speed of its progression. Appraisal is made not so much in terms of a job that keeps changing over the years but more in terms of the person and his interaction with fellow employees. As a result, increases in individual salaries are small, with little immediate significance, but with great impact in the long run.
Japanese companies feel that a sudden increase in the short run would upset the human balance which is essential to an efficient team and isolate the individual from the team. It is normal to say that after ten or more years of employment, people would not be getting the same amounts of salary as their fellow workers who came in at the same time. The twin system of regular employment/compensation has proven resilient not only to relatively short-term adverse times, but also to the long-term evolution of Japan’s postwar economy and society.
Prospects are that the flexibility of the system will be maintained over the next decade or so, namely over the span of time firms can manage with some confidence while experimenting with new practices. Although there might be imperfections in the Japanese firm, it is a fact that it has survived through many bad times and showed to critics that it had been the system that brought Japan to today’s economic power. Although it might be outdated in some senses, improvements can be made which does not require a complete makeover.