Introduction of Merit Pay Shocks Japanese

AS recessions go, Japan's present one is causing its usual share of job woes. Fewer school graduates will be hired, part-timers are being let go, and many workers promised lifetime employment have been shuffled to meager tasks until the economy picks up.

But at Honda Motor Company, a grander "labor adjustment" began this year that may herald a radical shift in how Japanese companies treat workers as they try to remain competitive globally.

To prepare itself for a period of slow growth and to raise productivity, Honda put its 4,500 white-collar Japanese managers on notice in April that their income will be based on individual performance, not on the company's.

While merit pay is the norm in the West, in Japan it has been almost taboo for decades. "It is social custom not to judge each other very rigorously in the work place," says Haruo Shimada, a Keio University economist.

The first shock of Honda's experiment will hit the company's Japanese managers on Dec. 10 when they receive their winter bonuses. Some managers will receive as much as $8,000 less than those of equal rank, which could cost them a loss of face as much as income.

"Most Japanese workers are not ready to accept this kind of system," says Dr. Shimada, who helped introduce the idea of merit pay to Japan. In fact, Honda has decided not to apply the system to factory workers, at least not yet.

In big Japanese firms, twice-yearly bonuses can amount to 40 percent of an employee's yearly income. The variable bonuses provide the company a flexible way to reduce labor costs during an economic downturn.

"If you just sit down on the job, you won't get paid," says Shinichi Tanaka, a Honda public relations official. "The world isn't what it used to be."

He explains that Honda's top brass has been redesigning the basic concept of jobs for three years after forecasting a global slowdown in car markets. Also, as the firm has globalized to the point where half of its employees are not Japanese, Honda can no longer keep two separate methods to determine salary increases. Prosperity forces change

Inside Japan, notes Mr. Tanaka, "a new generation of workers doesn't have the same sense of loyalty to a company as older workers did." It has become more common for young Japanese to job-hop as the nation has reached a high level of prosperity and as companies face a long-term labor shortage due to the end of a baby-boom generation entering the work market.

Honda is banking that its merit system will attract a new type of innovative and risk-taking worker who puts career first and the interest of the company second, allowing the company flexibility as it seeks new directions.

Still, for present employees, being judged so explicitly is a shock. Honda decided it needed to introduce the system over three years, starting first with bonuses and only later with salaries.

The most difficult part, however, is training bosses to be blunt, unambiguous, and detailed in what they expect of employees so that income can be raised objectively.

"Being explicit in expectations is quite unusual for a Japanese company," says Tanaka. "In the past, goals were vague. That was ok when markets were always growing, but now we must enhance productivity, and younger people want more challenge."

Most Japanese companies still do not evaluate individual performance, says Shimada, "they just base a pay increase on length of service, education, position, and age." Risks spur adjustment

A few other companies, such as Fujitsu, are also planning to try the new system, says Naoyuki Kameyama, research director of the Japan Institute of Labor, but not on the massive scale of Honda. "Japanese companies are entering into higher-risk businesses and don't want to be stuck with lifetime employees if those businesses fail," he says.

The new merit-pay system will conflict with many basic Japanese traditions, such as one that calls for similar workers in a firm to stand "equally on the same line of salary," Mr. Kameyama says.

He finds a "softening" of the old bonds between corporations and workers. "In the past, workers favored stability over wage hikes, and in return companies promised not to let workers go. This was a social understanding, a sort of gentleman's agreement.

"But now some companies find it is important to judge the skills of each individual, if only first at the management level. A new relationship will be formed between a corporation and managers," he says.

These Japanese companies realize that they must motivate managers differently than in the past, Kameyama says. When Japan was focused mainly on mass-production of goods, equal and harmonious treatment of workers was required. Now companies need to find new markets that require more flexible management.

Ironically, Kameyama notes, Japan had a system of yearly assessment of workers before World War II. After the war, stability in wages become more important and a "democratization" of the work place was introduced that meant there could be little gap in social standing.

"Japan's economy in the 1990s will rely on how it restructures its management," Kameyama says.

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