Individualisation of Wage, Individualisation of Employment Relations

1 Japanese Context

Individualisation of wage and individualisation of employment relations have been one of the hot topics in Japanese labour issues for these decades. But the context in which these topics have been discussed is fairly different from European one. First of all, I would like to explain the Japanese context in which wage and employment relations have been individualized.

In Japan, as well as in western countries, the wage formation and employment relationship were individualistic at the beginning of the 20^th century. Successive state interventions during the war and particularly active trade union movement just after the war transformed its employment system into more collective one.

The most typical wage formation principle was the Densan wage system of 1947, which focused on mainly worker’s age and the number of his family members. The older he was and the more he had dependent family members, the higher he would obtain wage. This was the livelihood wage system in which worker’s wage amount was hardly calculated on his individual performance.

Employers, in their side, intended to replace such “overly-seniority-based” wage system with “modern” and “western-style” job-based wage system, in which worker’s wage amount should be decided upon his job content not upon his seniority. In 1950s and early 1960s, Japanese employers’ confederation (NIKKEIREN) eagerly advocated introducing the job-based wage system, but they abandoned their intention after all.

Instead, NIKKEIREN began to advocate the “ability-based” wage system in 1969. The system prevailed around Japan rapidly. “Ability” here means the worker’s ability to perform his job. Precisely, it based on the evaluation of the worker’s ability by his bosses. They evaluated not only his performance but also his potential ability and even attitude. In reality, the evaluations of workers’ ability were just minor modifications to the mainly seniority-based wage profile.

From 1970s to early 1990s, Japanese companies and workers maintained this mainly seniority-based but partly ability-based wage system. Because “ability” is defined for each individual worker, it can be said to be the first stage of “individualisation of wage” in post-war Japan.

In mid 1990s, Japanese employers began to introduce more full-fledged individualistic wage system: “performance-based” wage system. However, we must be aware that Japanese “performance-based” wage system is not similar to the western “pay for performance.” Rather, it tends to be just sometimes upward but more often downward modification of basically seniority-based wage profiles. There is little notion of “job” in which worker’s performance should be evaluated. Anyway, Japanese wage system was clearly shifted from collective “seniority-based” one to more individualistic “performance-based” one.

Recently, particularly from mid 2000s, criticism to the “performance-based” wage system has surged. Some researchers denounced the system as it discouraged workers’ morale and motivation and deteriorated cooperative culture of Japanese workplaces. The 2008 Labour Economy White Paper also advocates review of the system in the light of workers’ satisfaction with work.

2 Ability-based Grade System

Ability-based grade system was and has been the basic structure of the traditional “ability-based” wage system. It is a grading system of workers’ “ability.” The outline of this scheme is as follows.

Under this scheme, there are a certain number of grades (A-G), which are further divided into sub-grades (A1-A5, B1-B5, etc.). Each sub-grade corresponds to a certain amount of basic wage. A high school graduate starts at A1, and a university graduate starts at B1. You can automatically be promoted to a higher sub-grade after spending the maximum period in a particular sub-grade. If your performance is excellent, you will be promoted in a shorter period and may sometimes skip sub-grade. Promotion to a higher grade or a sub-grade is decided on the basis of the evaluation of your job performance, potential ability and positive attitude to work, as well as your length of service.

The most important thing is that grades or sub-grades are attached to workers, not jobs. Originally, the scheme was designed to differentiate the treatment of workers according to their job performances. However, it was difficult to evaluate an individual’s performance in the Japanese team-oriented work environment. Moreover, length of service was considered to be the most impartial and acceptable criterion for worker’s “ability.” Therefore, performance evaluation tended to depend on seniority. If you were evaluated “potentially able” last year, it would be illogical for you to be evaluated “potentially unable” this year unless you have done fatal misconduct. This means there is little possibility for reduction of wage level in ability-based wage system. In this sense, ability-based wage system evolved as partly individualistic but mainly collective seniority-oriented system.

3 Spread of Performance-based Wage System

From early 1990s, lots of Japanese companies have introduced “performance-based” wage system. The pioneer was Fujitsu. The electronics maker introduced annual pay system to white collar workers in 1993. In 1995, NIKKEIREN published “Japanese management in a new era”, and advocated a new wage system based not on age and length of service but on performance. It was an epoch-making declaration because the emphasis was put on the objective performance, not subjective “potential ability” or “attitude.” The system prevailed to around half of all companies and almost all larger companies. The rationale for the introduction of the system was explained as 1) raising the morale of employees, 2) making wage system more satisfactory.

However, the employer’s intention of reducing labour costs of baby-boomers generation was hidden in the spread of performance-based wage system. In Japan, the cohort between 1947 and 1951 is particularly larger than cohorts in other age. As they approached their late-forties or fifties, their labour costs rapidly increased in the mainly seniority-based “ability” wage system. Performance-based wage system, in which individual wage levels can be restrained or even lowered, was intended to function as a mechanism for the downward modification of wage levels of over-expensive baby boomers.

Japanese “performance-based” wage system is, of course, inspired with American “pay for performance.” But we must discern the essential difference between these two systems. In the American system, the basic structure of pay system is job evaluation based on job description. Job evaluations are attached to jobs, not workers. Your demonstrated performance is evaluated on the particular job.

On the contrary, Japanese “performance-based” system lacks the concept of job description and job evaluation. The basic structure remains seniority-oriented ability-based grade system. Therefore, annual pay system, which was introduced as a typical “performance-based” system in 1990s, consists of two parts, basic annual pay determined on seniority and performance annual pay which varies with his performance. The latter part is determined on the basis of short term performance such as one year or even three months. And the performance in the last term is considered only in the determination of pay level of this term, not considered for the next term. This short-termism and non-accumulation of the past performance characterize the system.

4 Criticism to Performance-based Wage System

In 2004, criticism to the “performance-based” wage system surged rapidly. In this year, Prof. Takahashi of Tokyo Univ. published “False Performance Principle” and criticized that the system might deteriorate the morale of workers and that short-term evaluation of performance might destroy the cooperative relationship among workers which is indispensable for the long-term prosperity. He advocated “future-oriented principle” in which high-performing worker should be rewarded not with short-term pecuniary remuneration but with promotion to more challenging post.

In the same year, Mr. Joh, who had worked at the personnel division of Fujitsu for three years, published “The inside of Fujitsu.” The book harshly criticized the actual situation of the performance-based wage system in the company. In the book, Mr. Joh indicates that workers tend to stay away from challenging long-term tasks for fear of under evaluation and stick to easy short-sighted tasks.

Faced with the deterioration of performances, Fujitsu decided to review and revise the system in 2005. In the new “performance-based” system, evaluation is conducted not for individual worker but for working team, reward is provided not to individual worker but to working unit. Collectivism comes back. Other companies also followed this way.

In July 2008, Ministry of Health, Labour and Welfare published “Labour Economy White Paper 2008.” This policy paper raises questions about the rationality of linking the motivation of workers to wage and wage system. It suggests that we should consider linking the motivation of workers to the contents of jobs themselves.

5 Individualisation of employment relations

Japanese labour legislation regulates employment relations as follows: laws (including implementing regulations) nullify inferior collective agreements; collective agreements nullify inferior work rules; work rules nullify inferior individual contracts. In a word, collective rules precede individual agreements.

This system was established just after the war. Then, powerful trade union movement obtained egalitarian livelihood wage system such as Densan wage system. Individual working conditions were completely determined by collective agreements.

The introduction of “ability-based” wage system in 1960s was, in a sense, the first wave of individualisation of employment relations. Under the system, individual workers are evaluated their performance as well as potential ability and attitude. There are a certain range of differences among wage levels of workers even if they are not so wide. However, in the age of high economic growth, the small difference of wages among workers was not so serious problem as long as fairly high pay raise was ensured. Because this system was actually implemented in a seniority-oriented manner, the effect of individualisation was hardly perceived.

Meanwhile, the union density had declined from 55.8% in 1949 to 35.4% in 1970, to 25.2% in1990, and to 18.1% in 2007. This decline means that workers’ working conditions are more and more regulated not with collective agreements but with work rules which employers draw up unilaterally. Labour Standards Law obliged an employer to hear the opinion of majority union or majority representative in drawing up or amending work rules. However, in the companies without trade unions, non-union majority representatives are only nominal and it tends to be just rubber stamps.

The increase of non-regular workers such as part-time, fixed-term and temporary workers, who are hardly union members, also accelerated the individualisation of employment relations in the meaning of the shift from collective agreement to work rules as a mechanism of determination of working conditions.

From 1990s on, employment relations of white-collar workers have been intrinsically individualized in the form of performance-based wage system. The system is normally introduced with the consent of trade unions in the unionized companies. However, once this system is introduced, upward as well as downward modification of working conditions, based on the short-term performance evaluations of individual workers, are completely left to employers’ hands.

6 Individualisation of labour disputes and dispute resolution mechanism

When basic framework of labour legislations was established just after the war, labour disputes were mostly considered as collective ones. Labour relations commissions, which deal with collective labour disputes only, were established at national and prefectural levels. There was no individual dispute resolution mechanism . The expensive and time-consuming civil suit was the only way for individual worker to complain. At that time, dismissals as well as downward modifications of working conditions were considered as collective disputes and were lodged to labour relations commissions by the trade union of that worker. Actually, under seniority-based livelihood wage system and seniority-oriented “ability-based” wage system, labour disputes occurred as collective disputes except for few cases.

From 1980s and particularly 1990s on, the number of collective labour disputes lodged to labour relations commissions had been decreased. This was caused by 1) the decline of union density, 2) introduction of individualistic wage system and 3) the increase of non-regular workers who were hardly union members. Recently more than half of lodged collective disputes are not collective ones in nature. In typical case, a worker who was not union member is sentenced dismissal or pay reduction. Then he runs into local trade union and becomes a member of the union. He demands “collective bargaining” in the name of the union on the topic of his dismissal or unfair treatment only. Such dispute is collective in name but individual in nature.

Moreover, prefectural industrial relations offices, which had been established for the promotion of favorable industrial relations, came to receive consultations from individual workers who had complaint about their treatments. When labour lawyers association carried out telephone consultation service, they got unexpected number of consultation calls from individual workers, not from trade unions.

Faced with this trend, Law for Promoting the Resolution of Individual Labour Disputes has been enacted in 2001. The Law allows Local Labour Bureaus and the related administrative bodies to take part in the resolution of such disputes. The Director of the Bureau may establish dispute adjustment committee which consists of academic members to offer conciliation as requested. The dispute adjustment committee may propose a settlement plan, but the parties remain free to reject it. This is completely voluntary procedure.

In 2004, Labor Tribunal Law was enacted. This has been discussed in Judicial System Reform Council and its Labor committee since 1999. Some members in the Council advocated the establishment of labour court, in which social partners participate as judges, following the examples in European countries. As a compromise with reluctant members, the new labour tribunal system was formulated between distinct tripartite court and just judicial mediation scheme including social partners. The Law was enforced from April 2006.

The labor tribunal, composed of one career judge and two part-time experts (employer and worker), first makes mediation efforts. If the efforts fail, the tribunal makes a decision to resolve the case. The decision is not binding. But if neither party objects, the case is settled. If either party rejects the decision, the case is automatically transferred to ordinary civil procedure. The Law requires the tribunal to resolve the case within 3 sessions.