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In the years after the world war II, in spite of its strong work ethic, superior in technology has helped Japan to develop a technological economy. Today, Japan is the third largest economy after the US and China, measured by its exchange rates and Power Purchase Parity.
Japan is currently ranked second after the US in terms of its GDP  (Gross Domestic Product). According to source, Japan is expanded at an annual rate of 0.40 percent since the last quarter. From 1980 to 2010, its average GDP growth was 0.55 percent. From these observation, it is clear that Japan's economy will continue to expand as one of the successful country in Asia.
When looking back to its history, in the post war economy consist of close interlocking structures of 'Keiretsu', 'Keiretsu' are unique Japanese form of corporate firms, it can be consider as a grouping or family that form a close alliance to work towards mutual success. Corporate firms also have a close partnership between the government and bank as well as the interconnect structure of manufacturers, suppliers and distributors. Second to Keiretsu were the guarantee of life time employment of labor force. But more importantly, the Keiretsu and the ministry of International Trade and Industry together they played an important part in the Japanese economy recovery.
Since the early economic bubble, rise of global competition, change in domestic demographic and recession both of these features are slowly fading away from the Japanese economy. Life time employment, seniority based wage system and enterprise based unions were once known as the 'three golden pillars of Japanese industrial relations'. These practices have contributed immensely to Japan's high rate of economic growth and help to stabilize its labor relation in the postwar era.
In the early 20th century, life time employment or 'shushin Koyou' was considered as most common and traditional practice in large Japanese firms. There were two different aspects of long term employment. The first aspects involves the hiring of high school or college graduates, mainly through immediate hiring from new graduates. These employees will spend their entire careers at one corporation or corporate group.
Supporting these employees are corporate personnel-management systems, they are responsible for the annual mass hiring of new graduates, long-term skill development, the nurturing of generalists, and promotions that are awarded in their careers.
The second aspect is the corporate policies that are rooted in a long-term hiring strategy, which does not use short-term fluctuations in business conditions as excuses for making personnel adjustments. The rationale of this strategy is to retain employees and capture loyalty. Organizations make every possible effort to avoid discharging employees, even in bad times.
The strategy behind life time employment is that corporations bear responsibility to their employees by guarantee employment which will help to raises employee morale. In addition, corporations are not faced with the sudden need to hire large numbers of new employees or to incur substantial training costs in an economic recovery situation.
On top of that, long term employment ensure that both blue and white collar workers are recruited immediately after they leave school. Although it has been argued that company mainly target for 'white collar' rather than 'blue collar' employees. The system was initially designed to combat labour shortage and encourage labour training. However, this system is only privilege to regular employees. Temporary workers or part time workers are excluded.
In correspondence to life time employment, the next 'three golden pillars of Japanese industrial relations' is the tradition Densan wage system of 1947. This wage system also widely known as the 'seniority based wage system'. This system rely focused on the worker's age as well as the number of family members in his family. Employees' position and salaries rise regarding to his age, so the older he was, and regarding to the number of family members he has, the higher the wage. On the other hand, Individual performance was hardly accounted for in this wage system.
The system was largely supported by the labour unions in Japan as an efficient way to retain employees loyalty within the organisation. Its wage structure ensures wage rise until workers reach the age of 50 at most large corporations and 40 at smaller companies. In other word, salaries and positions rise in relate to the length of service within the company. The purpose behind this system was to ensure people who worked for the same amount of time contribution the same to the organisation.
Nonetheless, it was not long until employers intend to replace the 'seniority wage system' despite the controversy it was facing and majority urge the system to be replaced with a 'modern' and 'western' style wage system. Employers, in their side emphasis that workers' wage amount should be determine on their output and not seniority.
In 1969, it was not long until Nikkeiren  began to advocate 'ability based wage system'. The 'ability here means the worker's ability to perform his job from the evaluation of his employer. Although performance is vital, at the same time, attitude and potential ability are also judged by the employer. The system claimed that employees' wage should be based on actual performance and assessment of individuals capability other than on education measure and seniority.
Although this system was prevailed between 1970s and early 1990s, However, in mid 1990s, Japan introduced 'performance based wage system'. However, one should be aware that the 'performance based wage system' differ from the western 'pay for performance' From these evidence, one can conclude that Japanese wage system clearly shifted from 'seniority based' to a more individualistic 'performance based'.
This was one of the most major change in the Japanese economy, in fact, by 2004, 55.8% of all Japanese firms which had over 100 employees, had already shift to performance-based pay, and 26.7% of other firms had already made decisions to shift to the new system. Until today, many people do not fully accept this new system because it did not benefit the workers as much as it did for the old system. Although many firms began to implemented the system however many do not have a clue what the performance-based pay system involve, but simply because most foreign firms successful in cutting its labor cost. Despite the lack of attention to the quality of the system, it has caused confusion among companies.
The first company to ever implement this wage system was Fujitsu. The emphasizes of this wage system was focused on objective performance and not subjective potential ability. Its rationale was to raise employees morale and making the system satisfactory for all workers.
Even so, there has been increasing numbers of criticism to 'performance based' wage system in contemporary Japan.
The purpose of this thesis is to assess the strengths and weaknesses of 'seniority based wage system' and 'performance based wage system' and decide which was more suitable in Japan during the early 1990s. Advantages and disadvantages will be outweigh and identified.
Seniority based wage system Vs. Performance based wage system
As I have mentioned earlier, seniority based wage system has declined in Japan since the economic bubble burst in the early 80s. Many companies have to abandon this practice as they struggle to keep older employees with high salaries. However, was this wage system motivational towards employees in contrast to performance based. Hence we will now contrast the advantages and the disadvantages among the two system. Firstly, we will start off with the Seniority based wage system.
This system of promoting an employee in order of their near retirement. It is clear that the system allow older employees to benefit higher wage before his/her retirement. Although it has been argued by Sano (1976) that, the system is 'applicable mainly to male workers, more educated workers, full time regular workers, and those of large firms, and it is not so applicable to female workers, less educated workers, temporary or subcontracted workers and those in small firms.' (Kazuhiro, A 1982: 53) Even so, number of family members in their family are also taken into account. Position and salaries were reflected by their age and length of service within the company, so younger workforce and graduates will start off with low paid and increase later on in the workplace.
The idea of seniority-based pay lies in the purpose of guaranteeing the stable lives of employees. Nobuo Takahashi, a professor on the economics faculty of Tokyo University, believes that the seniority-based pay system is the ideal for management in Japan. He implies that people are working for their own will other than motivated by money that he believed was unhealthy. On the other hand, if money is not considered, then people are motivated by their interest and a health way to be motivated. (Takahashi 127)
For this reason, this system will ensure experience in the higher hierarchy within the corporation. As the longer the person has been employed in the company, the more knowledgeable they become of its internal operation. There will be balance between younger and older workforce in order to form a stable workplace as companies cannot maintain too many older employees as it will require large amount of wage. Conflict are less likely to occur because competition is low due to everyone earning the same amount of money and incentives. According to (Takahashi), employees become utterly supportive toward towards their colleague despite the lack of tension and competitiveness they face.
It is said that the seniority based wage system was mainly based on seniority. However this was only partially true. As explained by (Maruyama, T), 'the fraction based on seniority was only about 20 percent of the total monthly wages' (Maruyama, T 2005: 6) and about '65 percent was merit/skill-based'. (Maruyama, T 2005: 6) He further implies that the percentage has increased to 75 percent.
The seniority based wage system also helped to motivate blue collar workers. Due to the fact that they are rank at the same level as the white collar employees. However, white collar workers may become discouraged in the process. When referring to (Maruyama, T), it has been said that 'the productivity of blue collar workers in Japan is very competitive, but that white collar workers are a burden for their employers' (Maruyama, T 2005: 11).
Another feature of this system is its unique bonus system, It implies that older workers tend to get more bonus salaries than the younger counterpart, mainly due to seniority. Nevertheless, the amount of bonus largely depend on the firm's profitability.
From observation, we can clearly identify that there has been a lack of competitiveness and motivation among employees, the lack of both may result in lack of conflict. Conflict in organizational context can be seen as a solution to enhance productive force, as it help to stimulate ideas and opinions among employees to contribute towards the organization. In the modern business structure, the key of success does not mainly lie in structure or clarity. However, creativity and innovation, it is therefore important for conflict to take place for opportunity to improve.
The presence of the seniority wage system also discourages dissatisfied employees to change company in the middle of their career, this would mean losing all their accumulated financial advantages during their working years. On top of that, the culture of Japanese social norm often prevent employees from changes in inter-industrial employment, because they would be regard as unfaithful and as rejecting its work ethics.
According to Argy and Stein (1997), the acceptance of seniority based salaries came from the evidence that workers will achieve higher income as longer service within the company. (Argy and Stein, 1997: 143). However, Takahashi argues that the seniority wage system was not contradicted by the payment system based on productivity because company will continue to encouraged employees to learn their jobs until retirement. In other word, employees productivity are actually increasing the longer they worked. Argy and Stein (1997) further points out that it is hard for employees to move firm despite there will be a reduction in salary as they move on to a new firm. For example, their wage rate will be deteriorate, taken in account that they are new recruit.
Profit of the companies will be affected significantly. Although companies could employed more young workers to cut off on wages. On the other hand, their lack of expertise and experience will affect the company's function. If companies employed more old workers, it can have negative impact on company's profit due to higher average salaries. As a result, firms tended to reduce the number of older and less productive workers. However, in 1978, law was instituted by the government and required firms that possessed over 100 workers must have 6 percent of workers who are age 55 years old or above (Argy and Stein, 1997: 142).
(Abegglen) also contrast the idea of (Maruyama, T) and argued that the system of life time employment and seniority based pay, 'fail to link pay and performance was hampering the productivity of Japanese factories, but that it was nevertheless very much in harmony with aspects of Japanese culture' (Flath, D 2005: 313)
Performance based wage
Unlike seniority based wage, a distinguish advantage for this system is to enhance motivation of white collar employees. According to (Ohtake, F & Karato, K), from their research analysis they points out that the 'motivation of white collar employees was enhanced when the ways they worked changed under a performance based system. While the motivation increased of white collar workers, who believed that their wage were higher than those of employees who joined the same year, when they were given information by their superiors, that of employees with a low wage level was improved when they were given information by a labor union.' (Ohtake, F & Karato, K 2004: 33)
Secondly, performance based wage system was implemented in order to increase its total productivity. Companies required employees to make personal goals and to improve self managing abilities. In 1992, bonuses were paid to employees in Honda based on their accomplish of their self defined goals. Moreover, this also help employees to boost their self esteem from development of individual talents.
In addition, this system can also provide opportunities from younger workforce to showcase their skills and individual talent. That will help to enhance their self esteem within the company and build expertise that will benefit the company in a long run.
In recent years, Takahashi (2004) has criticized on this system. According to 'False Performance Principle' that was published by Professor Takahashi of Tokyo University. He criticized that the system might affect workers' morale and that short term evaluation of performance might destroy cooperative relationship among workers in the long run. Despite the fact competitiveness now occur among employees, those who are unproductive are likely to be discourage.
At the same year, employees who had worked at Fujitsu have challenged the system by emphasizing that workers will do their best to stay away from challenging long term tasks despite the fear of under evaluation from the company. This lead many workers to engage in short easy sighted tasks to be on the safe side.
Upon the introduction of performance based wage, Fujitsu developed the self-set goal system. The system was graded into different categories, however the task difficulty was not considered. For this reason, all workers began to abuse this advantage and set the easiest goals to achieve the top grade. At that time, the managers did not pay much attention to the process or the difficulty of the workers' goals. And for that reason, for many years, Fujitsu struggled to make its performance based system work as they were struggling to achieving its goal.
This is clear that performance based wage is inefficient if a company does not evaluates workers fairly based on performance. At the company, the evaluation is not only determined by the employer but also the productivity within department along with evaluations from employers from other department. Employees often complain about unfair evaluation because they receive different feedback from their employers, which caused further dissatisfaction among the workers, and possibly affecting the harmonic working environment in workplace.
Due to the inefficiency of performance-based pay system, it had caused complains and distrust from many Japanese workers. Even even though the employees demonstrated great productivity, in fact they may not be evaluated fairly. As for this reason, many employees become doubtful of the performance-based pay system. A lot of employees emphasis that seniority based-pay system offered better benefit for workers, including overtime payment. However, benefits were taken away to minimize labor expenses from the implementation of performance based wage. On top of that, regular annual wage have been restricted in order to reduce personnel expenses.
To conclude, the economic crisis has caused significant unemployment in Japan, causing many companies to ran out of money and being unable to rise its profit. To do so, an efficient way was to adopt performance-based pay system in order to cut its labor cost and further expenses. The immediate replacement of the system was required for most firms. On the other hand, if the Japanese industry was to remain with seniority based wage system, it will worsen the condition because the unemployment rate reflect on how strong the economy is.
This brings us to the conclusion that seniority-based pay system was a more suitable system during the 1990s era. First of all, all workers are guaranteed to be paid enough salary to support themselves. This will deteriorate layoffs, and for this reason, employees will become more connected to their companies. In the long run, older employees can offer advice and share knowledge with younger employees for the benefit of the company. The strong connection and support between the workers and companies will increases group productivity. Nevertheless, Japanese seniority-based pay system does not fully reflected on seniority, but also takes in the consideration of skill/merit based.
Many employers and economists are hoping to bring this system back in Japan, however it is very unlikely. In order to guarantee life time employment, firms must grow at a rapidly pace. In the contemporary context, Japanese firms are not growing fast enough to keep the seniority-based pay system.
Although seniority-based pay system is the ideal employment for many employees, but sadly, the recent decrease of the profitability of the Japanese companies is restricting companies to adapt the seniority-based pay system.