Subject executives to the merit-based pay system.

Like schoolchildren who worry about their report cards, a growing number of Japanese adults are nervous about evaluations of their efforts to achieve the targets they set at the start of the year.

These adults work for companies that have adopted a merit-based system in which salaries and promotions of employees are determined by bosses' evaluations of their performances, particularly their preset targets. The system is rapidly gaining popularity in the Japanese business community.

When the Japanese economy kept growing vigorously year after year, the seniority system of automatic pay increases was the norm in Japan. With ever-growing profits and low work-force turnover, Japanese companies and their employees were both quite comfortable with the seniority system, which compensates for low wages in early years at the company with fat paychecks in later years.

However, as the Japanese economy has entered an era of slow growth or even contraction, many companies now cannot afford to keep paying handsome salaries to all their senior workers. Fair distribution of limited resources for salaries according to employees' individual contributions to the bottom line has become the primary task in human resources management, driving the spread of U.S.-style performance-based pay.

Hard work and good performance, of course, should be rewarded fairly. Evaluations by objective criteria combined with remuneration could give employees a strong incentive to improve their job performances.

Such higher individual performances would contribute to the companies' bottom lines, thereby enhancing the employees' motivation further. Meritocracy ideally produces such a virtuous cycle.

There are, however, quite a few companies that have used the new pay system to give raw deals to young employees while providing generous compensation for sections with big in-house clout.

The Japan Institute for Labor Policy and Training, a think tank, recently conducted a survey on workers' sentiment toward compensation covering employees of about 1,000 companies. The results painted a bleak picture.

About 30 percent of the respondents said they were less convinced now about the merits of wages and bonuses based on performance evaluations than three years ago, while 20 percent said they were less certain about the fairness of such a system.

What are the problems? An instructor at a U.S. consulting firm that advises Japanese companies on the introduction of performance-linked compensation says such plans often fail when management has an ulterior motive, like the case of a poor-performing company that uses the system to pare down its payroll.

If a merit-based pay system is adulterated with management's desire to find fault with employees or cut labor costs, the instructor observes, it would damage the morale of employees and sap the vigor of the company.

Indeed, Yamaichi Securities Co. and the Long-Term Credit Bank of Japan Ltd. introduced such a pay system, but both collapsed without improving their performances.

Performance-linked pay is apparently not suitable in some industries. While the results of efforts by employees at banks and manufacturers can generally be measured with relative ease, some observers argue, performances of employees at securities companies and high-tech businesses don't lend themselves to fair measurement because these companies are more susceptible to cyclical ups and downs affecting entire industries.

Exempting a certain part of the work force as an ``off-limits'' area also undermines the effectiveness of meritocracy. A survey by the Institute of Labor Administration has found only 28.6 percent of the companies with 1,000 or more employees subject directors to performance evaluation. Unless top executives first embrace meritocracy for themselves, workers are unlikely to accept it.

Keen awareness among workers of these grim realities is probably behind the brisk sales of books that criticize the performance-based system by citing many concrete examples of its flaws.

Instead of borrowed plumes, each company has to make efforts to refine this approach to make it a fair program tailored to its own management needs.

The season for winter bonuses is around the corner. Executives will soon face evaluation about their performances as to how they have ensured convincing evaluations of employees' performances.

--The Asahi Shimbun, Nov. 30(IHT/Asahi: December 1,2004)