Myths and Realities of Wage Reform: Evaluating "Pay for 
Performance" in the Japanese Firm

Tsuyoshi Tsuru
Freeman Visiting Professor of Economics, UCB
Institute of Economic Research, Hitotsubashi University

Thursday - 1:30-3:00 pm - Speakman Hall 318 (Carzo Room). 

Since the mid-1990s, many Japanese firms have implemented 
various personnel reforms to cope with long-standing 
economic stagnation and to induce greater work effort.  It 
has been recognized that one of the major problems with 
Japan’s HR system is that it puts too much emphasis on 
potential job ability and seniority.  The solution proposed 
has been pay for performance. However, what does pay for 
performance mean in the context of the Japanese HR system? 
What effect does pay for performance have on intra-firm wage 
structure and on individuals’ work effort?  This 
presentation examines the processes and outcomes of the wage 
reforms in Japanese firms, using unique sets of personnel 
data and questionnaire survey results.
The empirical analysis reveals the following points.  First, 
the skill grade compensation system used by Japanese 
companies has tended to attach increasing emphasis to 
seniority. Companies have found it difficult to solve this 
problem within the framework of the existing system.  This 
is the driving force behind the adoption of the new 
compensation systems labeled “pay for performance” in the 
1990s and in the New Millennium.  Second, the new systems 
have in fact altered the compensation structures of the 
firms introducing them. Wage distributions have flattened 
and wage gaps among employees have widened.  Third, despite 
reshaping pay structures, Japanese firms may not have 
enhanced the overall work effort and individual performance 
of their employees.  Indeed, by fostering greater divisions 
and competition among employees, pay-for-performance systems 
may even be counterproductive.