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Research Paper:
Historical Background
Japan's current economic crisis
Japan's struggle to restructure
Does performance-based pay work properly?

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How can Japanese firms balance their profitability with the satisfaction of the work force?

By Hiromi G.


Summary of the paper

        The increase in the unemployment rate was inevitable after the economic crisis in Japan. The companies ran out of money and did not and still do not have effective methods to raise their profit in the competition of globalization. As a result, they come to the decision to cut labor costs by adopting the performance-based pay system. However, the issue is not only how they restructure their management system, but also how they balance profits with personnel fees. The immediate replacement of the management system is required for most firms, but a too rapid and inefficient shift causes a high unemployment rate. On the other hand, if the Japanese industry does not replace its management system, the condition will become even worse because the unemployment rate very much depends on how strong the economy is.

            Each firm has its own way to solve this issue because each company has its own features and culture. The differences also appear in what kind of business the company deals with. It is impossible for the Japanese economy to immediately return to its former status back in the 1960s, when economic growth was at its peak. The situation of the Japanese economy is a little similar to the situation which Japan had immediately after WWII, because they did not know how to recover their economy efficiently and rapidly at the same time. The difference today is the wealth of the citizens. Their present living standard compared what it was in the 1950s is evidently better, but their living expenses are now much higher as well. To have a high quality of living, the employees need to be paid a higher salary. One thing that Japan did not have to consider in the 1950s as much as now is the living standard of people, and that is why the economy recovered from the terrible condition in ten years after WWII. However, Japan is still struggling to recover its economy ten years after the economy crisis in 1991. It is tough to find the solution that can raise both profitability and satisfaction of workers in short term. What is required is to find solutions that can sustain constant profitability, while the workers are satisfied with management and wage system. Japan has an ability to overcome this hardship, as it has done overcoming many obstacles and has become one of the most important economic nations in the world.

The revival of the seniority-based pay system

        The first possible solution is to revive the seniority-based pay system. The biggest advantage of the seniority based pay system is that all workers are guaranteed to be paid enough salary to support themselves. There are no worries about layoffs, and because they do not worry about layoffs, they are more connected to their companies. The strong connection between workers and companies increases group productivity. Also, the Japanese seniority-based pay system is actually not fully based on seniority, but it is also based on the skills of workers. The idea of the revival of the old system actually has become reconsidered among employers and economists in Japan (Mizoue).

        In fact, it requires firms to grow rapidly in order to guarantee secure employment, and most Japanese firms do not grow fast enough to keep the seniority-based pay system. Even though the seniority-based pay system is the ideal employment for many employees because they are able to become wealthy enough to live well, the recent decrease of the profitability of the Japanese companies does not allow the companies to adapt the seniority-based pay system.

The complete shift into the performance-based pay system

        The second possible solution is to complete the shift into the performance-based pay system. It also means the complete Westernization of the Japanese firms. They have to give up all characteristics that they have had for a long time. The merit of this system is that it can significantly reduce the labor costs because the companies have to only pay base salary based on the performance of workers. It is apparently the best way for the companies to make a profit in the short term. However, it does not secure the employment of less productive workers. Besides, Japanese firms have grown with the seniority-based pay system, so to complete shift from the seniority-based pay system to the performance-based pay system is very hard to do successfully. Also, the recent economic deflation makes the performance-based pay system even harsher on workers because the companies have to reduce costs tremendously.

Assimilation of the seniority and performance-based pay system

        The last possible solution is to merge the seniority-based pay system and the performance-based pay system. The companies can keep the idea of lifetime employment, while the promotion and increase of salary is determined by their performance. The merit of the system is that the secure employment is guaranteed and the company can reduce the money which the company has to spend on laborers. Secure employment allows employees to work for a company instead of working solely for money. It is very significant that a company has to have a clear and fair evaluation for its employees’ performance. Evaluating workers fairly and treating them respectfully should allow workers to rely on the companies more, and the reliability of the company then encourages the employees to work hard. Before the bubble burst, Japanese workers did not understand how hard it was for the companies to sustain the 1940 system and how much the 1940 system could protect their stable lives. Now, they know that the companies no longer have enough profitability to sustain the old system, but the companies have to sacrifice the workers to survive. Demonstrating that companies are trying to protect the employees encourages employees to work intensely in order to keep up the profitability of the companies, which protects their stable lives. However, because the system does not concentrate on either the profitability of the company or the satisfaction of the workers, it may not satisfy both its employers and employees. In any cases, the companies have to be flexible in response to the voices of workers, and it should maintain the strong connection between the companies and the workers. There are some companies that adapted this system, but they are still uncertain how this system affects their companies. As a researcher of this topic, I hope this solution will show some great advancement in near future.