converging or still diverging? a comparison of pay systems in the uk and japan

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Converging or still diverging? A comparison of paysystems in the UK and JapanToshika SudaPublished online: 24 Apr 2007.

To cite this article: Toshika Suda (2007) Converging or still diverging? A comparison of pay systems in the UK and Japan, TheInternational Journal of Human Resource Management, 18:4, 586-601

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Converging or still diverging?A comparisonof pay systems in the UK and Japan

Toshika Suda

Abstract Japan is often seen as being representative of organization-based HumanResource Management (HRM). However, according to recent research in Japan, thereappears to be a move towards market-based HRM. The author examined whether JapaneseHRM was actually shifting towards market-based HRM by comparing Japan with the UK,which is often said to epitomize market-based HRM, and their pay systems. The authorfirst identified key characteristics of the Japanese and UK pay systems and thereafterexamined whether the key characteristics of these pay systems have been experiencing anychanges. As a result, it was found that Japanese pay systems have been changing towardsmarket-based pay systems, while there were have been few changes in the UK paysystems. Furthermore, it was shown that the changes in the Japanese pay system weresequential. This phenomenon supports the configurational perspective among the threepopular HRM perspectives – universalistic, contingency and configurational.

Keywords Organization-based HRM; market-based HRM; convergence versusdivergence.

Introduction

Many researchers agree that capitalism and management systems are largely divided intomarket capitalism and organization capitalism, and it is generally a given that Anglo-Saxon countries represent market capitalism and Germany and Japan representorganization capitalism (Albert, 1991; Dore, 1973, 1989, 2000; Whitley, 1992). HumanResource Management (HRM) systems from one area of management systems. HRMsystems are also largely divided into two types; market-based and organization-based.The UK is often used to represent market-based HRM and Japan is often used asrepresentative of organization-based HRM (Dore, 1973, 1989; Whitley, 1992).

However, many recent surveys have found that Japanese HRM has changed in manyrespects. For example, a survey by the MHLW (Ministry of Health, Labour and Welfare,2002) found there had been a change in the policy relating to lifetime employment.‘Emphasis on lifetime employment’ has decreased from 31.8 per cent in 1993 to 8.5 percent in 2002. Among respondents with over 5,000 employees, the rate has beendecreasing, falling from 51.6 per cent in 1993 to 14.2 per cent in 2002. Where the systemof seniority is concerned, seniority pay has been in constant decline since the late 1950s.According to a survey by the Central Committee for Labor among firms with a turnover

The International Journal of Human Resource Management

ISSN 0958-5192 print/ISSN 1466-4399 online q 2007 Taylor & Francis

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DOI: 10.1080/09585190601178877

ToshikaSuda,Adachi-ku,Ayase2-25-7-405,Tokyo120-0005, Japan (e-mail: [email protected]

[email protected]).

Int. J. of Human Resource Management 18:4 April 2007 586–601

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of more than ¥500,000,000 and employing more than 1,000 employees, pay levels of 55-year-old workers compared with 22-year-old workers have been declining, having been6.08 times higher in 1958, 4.27 times higher in 1970, 3.78 times higher in 1980, 3.46times higher in 1990, and 3.06 times higher in 2002.

The direction of these changes seems to signal a change towards market-based HRM,that is, Japanese HRM which once represented organization-based HRM seems to beconverging towards market-based HRM. Using the pay system (one area of HRM), theauthor then researched whether Japanese HRM really is converging towards a market-based HRM or whether it is still divergent. The UK pay system, which representsmarket-based HRM, was compared with the Japanese pay system. The subject of thisresearch is the pay systems for permanent workers. The HRM system, and within this,the pay system for permanent workers and contingent workers, is different, and thedifference is particularly large in Japan. If pay systems for contingent workers were tobe included, the research might lose clarity in the process of comparing the two types ofpay system. This research aims to contribute to the long-standing debate relating toconvergence/divergence in global economic and management systems through anexamination of the directions of change in pay systems.

Theoretical framework for the research

Convergence versus divergence debate

There have been numerous debates on convergence/divergence of economic andmanagement systems around the world. More than 40 years ago, Kerr et al., (1962)suggested, in support of the convergence theory, that countries tend to develop increasinglysimilar industrial features, including industrial relations, as industrialization progresses.The prime driver for convergence is advances in technology. A disciplined workforce and abroader role for government provide the infrastructure for industrialization. Researchers(Berger, 1996; Boyer, 1996; Lane, 1995) have identified the main conditions that pave theway for convergence, such as globalization of economic activities, government policy andthe approach to regulation. Berger (1996) summarizes three possible routes throughglobalization: convergence as the triumph of market forces, aided and abetted by complicitor passive governments; convergence as a result of the diffusion of best practice andcompetition among institutional forms; and convergence as the internationally negotiatedor coerced choice of one set of rules and institutions.

Despite claiming convergence of economic and management systems, a number ofinternational comparative studies report differential characteristics in each nation orregion, such as with regard to the two types of capitalism. Cultural theory andinstitutional theory are often cited as divergent theories. Cultural theory emphasizesculture as a factor which makes people’s behaviour and economic activity different.While cultural values are considered to be deep-seated and enduring, culture isconsidered to be immutable. Economic activity between nations with different culturesshould on that basis remain divergent. Institutional theory emphasizes that a nation’seconomic activities are influenced by social institutions, key institutions being the state,legal system, financial system and family. It stresses the historical embeddedness ofsocial structure and process. Institutional theorists acknowledge the significanceof culture, but it allows the possibility of cultural modification. These theories are usuallyviewed as being at the opposite pole from the universalist perspective which supports thetheory that economic activities around the world are convergent towards best practice(Child, 2000; Lane, 1989, 1995; Whitley, 1992, 1999).

Suda: A comparison of pay systems in the UK and Japan 587

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Relationships between HRM perspectives and the convergence/divergence debate

There are three popular perspectives on HRM: the universalistic perspective, thecontingency perspective and the configurational perspective (Boxall and Purcell, 2000,2003; Delery and Doty, 1996; Matsuyama, 2005; Richardson and Thompson, 1999).Here, the relationship between these three perspectives on HRM and positions in theconvergence/divergence debate is discussed. First, each of the perspectives is brieflydescribed.

. Universalistic perspective: The greater use of specific HRM practices will alwaysresult in better (or worse) organizational performance (Delery and Doty, 1996).

. Contingency perspective: whether specific HRM practices result in better or worseorganizational performance depends on contingencies (i.e. external or internalfactors) (Delery and Doty, 1996).

. Configurational perspective: a specific combination of HRM practices can beidentified that generate higher business performance, but these combinations willvary depending on organizational context (Richardson and Thompson, 1999).

The defining assumption of the universalistic perspective is that there is a singleoptimal and universally applicable practice, regardless of the internal and externalfactors. Therefore, the universalistic perspective would support positions ofconvergence. In contrast, as the contingency perspective emphasizes fit among internalfactors and fit with external factors, the contingency perspective would support the ideathat where external factors such as social and economic factors differ between nations,management systems between these nations will remain divergent. As mainstreamcontingency theory tends to emphasize the technical environment – for example, marketcompetition and technology in a universally applicable environment which does not takenational characteristics into consideration (Lawrence and Lorsch, 1967), research basedon this type of contingency theory is unlikely to emphasize the differences in economicactivities that exist between the nations. However, the concept of contingency theory interms of emphasizing fit with external factors would support divergence of economicactivity between the nations, if those external factors are different.

Both contingency and configurational perspectives are examples of the so-called ‘bestfit’ perspective. The main difference between contingency and configurationalperspectives is that the latter perspective draws on a more holistic picture to identifyconfigurations, or unique patterns, of factors that are posited as being of maximumeffectiveness. These configurations are said to represent non-linear, synergistic effectsand higher-order interactions that cannot be represented within the traditional bivariatecontingency perspective (Boxall and Purcell, 2000, 2003; Delery and Doty, 1996;Matsuyama, 2005; Richardson and Thompson, 1999). Therefore, the configurationalperspective emphasizes that systems consisting of a particular configuration achievinginternal fit can have a greater effect than the sum of each effect brought by each elementin the system. Research into recent trends in the UK and Japanese pay systems may findwhich among the three HRM perspectives most properly explains the trends.

Comparison of UK and Japanese pay systems

The author researched recent trends in UK and Japanese pay systems in order to examinewhether the two types of pay system are converging or divergent. The author started byidentifying the key characteristics of UK and Japanese pay systems, and set a criterion tojudge whether fundamental or significant changes have occurred in the two types of pay

588 The International Journal of Human Resource Management

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system. The criterion used was whether or not the key characteristics identified have beeninvolved in the changes in the UK and Japanese pay systems. This is because minorchanges often occur in many of a society’s systems, and so if all changes are classified as‘change’, both UK and Japanese pay systems will almost always change. Therefore, onlywhen the key characteristics of the two pay systems change does the author consider thatthe pay systems have changed.

Factors for analysis of pay systems

To begin, the author identified the basic factors within a pay system – job, market andperson – in order to be able to identify the main characteristics of Japanese pay systems.The reasons why these three factors determine pay systems are described below.

Labour markets are generally divided into two types: external labour markets andinternal labour markets (Doeringer and Piore, 1971; Williamson, 1975). The markettaken in this paper as the factor for analysis of the pay system is mainly the externallabour market. According to economic theory, individual pay levels are determined bythe value of the job and the person in the market place and by the organization(Dunlop 1964; Williamson, 1975). In the internal labour market, the pay system,including the pay structure, is used as a component for determining the pay levels ofindividuals.

There are two basic types of pay structure1 job-based and person-based (Lawler, 1990;Milkovich and Newman, 2002). While in many advanced countries the job-based paystructure is popular, it is the person-based pay structure which is more popular in Japan(Koike, 1994, 1999). In the job-based structure, the pay rates may be determined byreference to relative internal value (established by job evaluation) and externalrelativities (established by market pay data) (Gomez-Mejia and Balkin, 1992; Milkovichand Newman, 2002). Thus, the job and the market are the factors that determine paystructures in the job-based pay structure. Pay levels of individuals increase within asalary grade or between salary grades according to the individual’s contribution or timein the job. Therefore, the factor considered in pay systems is the person (performance andtime). Consequently, job, market and personal factors determine individual pay levelsand constitute pay systems in a job-based pay system.

In the person-based pay structure, personal performance and personal attributes suchas skills, knowledge and behaviour determine pay rates and pay structure (Lawler, 1990,2000; Milkovich and Newman, 2002). In theory, this means that pay levels aredetermined by the person’s value based on internal and external relativity. However, asmarket rates of pay for personal elements have not been established (Lawler, 1990;Schuster and Zingheim, 1992), market rates of pay have no direct influence on individualrates of pay. Therefore, only the person factor determines individual pay levels andconstitutes the pay system in a person-based system.

Identification of the three key characteristics of UK and Japanese pay systems

The author identified job, market and person as the basic factors that determineindividual pay levels and the way in which a pay system is constructed. Pay systems inJapan and the UK are analysed using these three factors, and three contrastingcharacteristics in the two types of pay system are identified:

. person-based system versus job-based system;

. organization-based system versus market-based system; and

. stock-based system versus flow-based system.


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The first characteristic concerns the job- and market-based pay system in the UK. The

pay rate is basically related to the job based on its relative value, which is assessed

internally and externally. Internal value is determined based on analysis and job evaluation,

and external value is determined based on market value of the assigned job. These

characteristics are demonstrated by a number of surveys. For example, a survey by CIPD

(Chartered Institute of Personnel and Development) (2005) asked what method was used to

manage the pay structure. The largest proportion in the manufacturing and service sectors2

who participated in the survey answered ‘pay structure linked to individual job worth

(salary or “spot” rates, typically linked to market rate)’, at 58 per cent for manufacturing

and 54 per cent in the service sector. On the basis of these survey results, the UK system is

clearly a job- and market-based one.The second characteristic concerns the person-, and organization-based pay system in

Japan. The Japanese pay system is generally considered as being based on shokunou

shikaku seido (qualification system based on job-related ability). Shikaku (qualification)

is an internal qualification recognized only in each organization. The qualification

system is the system that divides employees into grades according to their job-related

abilities. This grade is called shokunou shikaku toukyu (qualification grade based on job-

related ability). Each employee is classified into a certain qualification grade in this

system. A survey by Nippon Keidanren (2002) found that 69.5 per cent of respondents

used the qualification system for managers and 71.6 per cent used it for non-managers,

and 15.5 per cent used a job grade system for managers and 6.9 per cent used it for non-

managers. We can see from these results that the qualification system based on job-

related ability (person grade system) is more widespread than the job grade system. A pay

system based on shokunou shikaku seido is called shokunoukyu (job-related ability pay).

Various surveys show that job-related ability pay is very significant compared with job-

related pay (shokumukyu). For instance, in a survey by the Institute of Labour

Administration (2001), 72.4 per cent used job-related ability pay and 13.8 per cent used

job-related pay. Job-related ability pay is clearly dominant in Japan.With regard to the organization-based pay system in the Japanese system, in Japan

individual pay levels are determined based on an internal assessment of individuals’

value (as a form of job-related ability). External market value (often expressed as market

pay) is not considered in individual pay determination. The widespread use of the person-

based pay system may be the reason why market pay is not widespread in Japan.

If person-related pay is implemented, it is difficult to establish the going rates for the

value of individuals in the labour market, as all individuals differ with regard to their

skill, knowledge, motivation, attitude and behaviours.The third characteristic concerns the flow-based system for the UK system and stock-

based system for Japanese pay system. In both Japanese and UK pay systems, person

factors are used for pay progression, but focal points in the person factor differ between

the two systems. In the Japanese pay system, individual pay levels are linked to the

qualification grade. The main method used for qualification grade promotion is the sum

of appraisal rating points. For example, a survey by JMA Management Center (2000)

found that 84.2 per cent used ‘the sum of appraisal rating points’ as the criterion for

managers and 78.9 per cent for non-managers. Another major method is years of service

in one qualification grade. There are three types of criteria for grade promotion:

minimum, standard and maximum. In a survey by the Institute of Labour Administration

(1996), 79.7 per cent set guidelines for a minimum number of years of service, 41.2 per

cent set guidelines for a standard number of years of service and 31.1 per cent set

guidelines for a maximum number of years of service, for all or some grades.


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Even if employees show very high performance and value, and their job levels arepromoted to higher levels due to recognition for their high level of performance, if thesum of their rating points does not reach the sum of rating points and years of service setas criteria for the grade promotions, their grade levels are not promoted. Therefore, thecurrent value of employees does not necessarily reflect the grade levels. As pay levels arebasically attached to the grade level, pay levels are determined by the results of appraisalin the long term and by years of service, rather than by the current value of employees.This paper calls this characteristic of the Japanese pay system the stock-based system,and calls a pay system based on the current value of employees the flow-based system.

In contrast, in the UK pay system, the flow aspect of the person factor is more focused.Pay levels are attached to currently assigned jobs. External market rates for jobs indicatethe current value of the job in the external labour market. The job- and market-based paysystem is well suited to the task of judging the current value of employees. Among typesof person factors, an output measurement such as individual performance is given moreprominence than an input measurement such as years of service, competencies and skills.For example, according to the CIPD survey (2005), major answers in the private sector(only answers relating to person factors are indicated), for criteria used to manage payprogression, were: ‘based on individual performance and skill/competency’ – 67 percent in manufacturing and 63 per cent in services – ‘wholly based on individualperformance’ – 30 per cent in manufacturing and 31 per cent in services – ‘service-related increments’ – 9 per cent in manufacturing and 8 per cent in services – ‘whollybased on competencies’ – 6 per cent in manufacturing and 6 per cent in services –‘wholly based on skills’ – 11 per cent in manufacturing and 5 per cent in services.

Internal fit among the main characteristics in the two types of pay systems

The three characteristics of the Japanese pay system fit with each other. With regard toperson- and organization-based systems, if firms choose a person-based system, anorganization-based system is the only option, and the market-based system is notavailable as an option, as discussed above. Furthermore, the person-based andorganization-based systems are suited to the stock-based system. Under the stock-basedsystem, the individuals’ current value and performance levels are not necessarilyconsistent with their pay levels; therefore, stability in the level of pay is desirable. This isbecause employees may not agree with a change in their pay levels in a situation wheretheir pay levels are not necessarily consistent with their current value and performancelevels, if pay levels change from time to time. Pay levels can change as a result of achange of job assigned under the job-based system, and market pay can change inrelation to demand and supply in the labour market. In contrast, although the personfactor and internal evaluation can change, these changes may be more gradual than injob- and market-based systems. For example, although the internal evaluation can changewith a change of appraisers, the HR department can co-ordinate or intervene inthe internal evaluation. However, the HR department cannot co-ordinate or intervenewhen it comes to market rates. Considered in this way, the three characteristics, person-,organization- and stock-based pay systems are suited to each other, as illustrated inFigure 1.

In contrast, in the UK pay system, pay levels are attached to currently assigned jobs.External market rates for jobs indicate the current value of the job in the external labourmarket. The job- and market-based pay system is well-suited to the task of judging thecurrent value of employees. Among types of person factors, output measurementis given more prominence than input measurement. Output prominence is suited to,


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or strengthens, the flow-based system, which focuses on the performance or value ofemployees. The content and levels of individual performance are determined basedon assigned jobs. Therefore, the job provides the standard of content and levels ofperformance in the job-based system. The relationship between the three characteristicsis illustrated in Figure 2.

Current situation of the UK and Japanese pay systems found in existing researches

The author identified the three key characteristics of the UK and Japanese pay systems. Thekey characteristics were set as criteria to judge whether fundamental changes occurred inthe two types of pay system. Research then followed into the recent trends in the two typesof pay system. The research had two stages. The first stage was research based on existingresearches (large-scale surveys). The purpose of this was to capture general trends in thetwo types of pay system. The second stage was case studies. The author conducted casestudies for ten firms in Japan and eight firms in the UK. The main purpose of the casestudies was to set out the pay system situation in detail, and to identify how and why paysystems change (or do not change). Both these objectives are important for understandingprecisely the pay system situation and for analysing the future directions of the two types ofpay system.

Here, the recent pay system situation in both Japan and the UK is investigated usingexisting large-scale surveys according to the three key characteristics identified earlier.The main changes in the Japanese pay system are discussed first. The first change notedis the introduction of the job-based system. Although the person-based pay system isstill the most widespread system in Japan, it can be seen that use of the job-based paysystem has been increasing rapidly, if a broader concept of the job-based pay system isadopted. For example, annual surveys by the JPCSED (Japan Productivity Center forSocio Economic Development) broadened the concept for job-based pay of the 2001survey. The 2000 survey determined job-based pay as shokumukyu (job-related pay),and the survey defined shokumukyu as ‘pay determined based on job analysis and jobevaluation’ (2000: 46). The job-based pay system in the 2001 survey includedshokumukyu (job-related pay) and yakuwarikyu (role-related pay). As a result, the

Figure 1 Internal fit in Japanese pay system

Figure 2 Internal fit in UK pay system


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proportion using job-based pay increased from 21.1 per cent to 43.9 per cent formanagers and from 17.7 per cent to 24.9 per cent for non-managers. The 2001 surveydid not define yakuwarikyu (role-related pay). Instead, the survey asked what criteriawere used in determining the role grade. The major answers were level of responsibility(65.2 per cent), level of position (54.5 per cent), level of difficulty and complexity ofjob (28.0 per cent) and number of subordinates and level of people management(26.5 per cent). From these answers, the role grade system among the respondents maybe similar to a non-analytical job evaluation scheme. In Japan, job-related pay isgenerally seen as pay based on job analysis and analytical job evaluation, particularlyusing a point-factor scheme. The author assumes that this may be one of the reasonswhy surveys find that use of job-based pay is not high. Therefore, if a broader conceptof the job-based pay system is adopted, the use of the job-based pay system can beconsidered to be increasing.

The second change concerns change from a stock-based towards a flow-based system.While there are various aspects of change in the Japanese pay system, the strongestdirection of the change may be that focusing on performance (output aspect of the personfactor). The Japanese type of person-based pay system focuses on the input aspect of theperson factor, such as job-related abilities and personal characteristics, for example ageand year of service. However, this characteristic is now changing towards greater focuson the output aspect. For example, in a survey by the JPCSED (2002), 60.5 per cent ofrespondents said yes to ‘focusing on performance for pay and promotion’ for managers,31.8 per cent for non-managers. ‘Focusing on job-related ability for pay and promotion’was acknowledged by 29.2 per cent for managers, and 52.5 per cent for non-managers.Giving prominence to the output aspect means a change from a stock-based systemtowards a flow-based system, since output is related more to the current value ofemployees than to the long-term contribution of employees.

Furthermore, change towards a job-based system as discussed above is also related tochange from a stock-based system toward a flow-based system. Jobs provide therequirement for person factors such as skills, knowledge and behaviour to performcurrently assigned jobs. This means that a job-based system is more likely to focus on thecurrent value of each employee than on his/her long-term contribution.

As described, we can see that two of the three key characteristics in the Japanese paysystem – the person- and stock-based system – are now subject to change.

Next, the UK pay system is investigated according to the three key characteristics.We know that there were no changes for the three key characteristics from the CIPDsurvey (2005) indicated earlier. For example, the major method for managing the paystructure is ‘pay structure linked to individual job worth (salary or “spot” rates, typicallylinked to market rate)’. The UK pay system continues to retain the characteristics of ajob-based, organization-based and flow-based system.

Case studies

Case study framework

An investigation using case studies was undertaken as the next stage. The case studies setseveral conditions in order to reduce extraneous variables. Some of the main conditionsare discussed here. The case studies set conditions for selection of the case study firms.The three main conditions are: organizational size (firms with more than 1,000employees); ownership structure (indigenous firms – UK-owned firm in the UK orJapanese-owned firm in Japan); and industrial sector (telecommunications, food and


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drink, chemical and pharmaceutical, retail and oil). The case study firms are selectedfrom these five industrial sectors.

The case studies also set the condition of investigating the pay system for white-collarworkers, as in six UK case study firms there were more than two types of pay system inoperation. The main reason for this choice is that pay systems for white-collar workersand for blue-collar workers in the UK, and pay systems for permanent workers and forcontingent workers in Japan are very different. There are many similarities between paysystems for white-collar workers in the UK and for permanent workers in Japan, andbetween pay systems for blue-collar workers in the UK and for contingent workers inJapan. For example, salaries are mostly paid monthly and pay progressions are mainlydetermined through appraisal in white-collar workers in the UK and permanent workersin Japan. The author considers that it is pay systems for white-collar workers in the UKthat are the counterpart to pay systems for permanent workers in Japan, hence they arethe object of the current research.

Changes in Japanese case study firms

All the case study firms in Japan have changed their pay systems since the mid 1990s.Table 1 compares elements considered in individual pay determination before and afterthe change.

This paper analyses changes in the pay system (Table 1) according to the three keycharacteristics: person-,market- and stock-based system. The first concerns the change froma person-based system towards a job-based system. Among the ten case study firms, fourfirms introduceda job-based system for all employees and three firms introduceda job-basedsystem for managers. The change from a person-based system towards a job-based systemalso accompanies a change from a stock-based system to a flow-based system, as discussedearlier. After the introduction of a job-based system, for employees whose job levels wereassessed at lower grades than their pay levels, two of the case study firms decreased paylevels to that equivalent to the employees’ job grade levels, within three years. One casestudy firm introduced a policy to decrease pay levels for such employees within five years(five years had not passed at the time of the case study). The other four firms did not decreasepay levels, but instead froze pay levels for those employees.

The second change is one from a stock-based system towards flow-based system. Themost significant change in this category is probably the increased emphasis onperformance. As indicated in Table 1, all case study firms increased performance-relatedpay. One concrete method used by the case study firms was to make pay differenceslarger according to employees’ appraisals. For example, as Company J1 abandoned age-related pay, the proportion of pay influenced by appraisal ratings increased. Before theabolition of age-related pay, appraisals only influenced the job-related ability pay.Furthermore, rates of increase/decrease in pay became greater according to appraisals.Before the change, pay differences from appraisal ratings stood at only 2 or 3 per cent,but pay differences by appraisals increased to about 10 per cent as an average among allmanagerial grades (pay differences are larger in the higher grades), and a pay decreasesystem was introduced for employees obtaining low ratings. Eight case study firms usedan MBO (Management by Objective) scheme to measure individual performance, with adirect relationship between results of the MBO, performance appraisal and pay. Insteadof emphasizing performance, all case study firms abandoned or reduced age-related pay.Age-related pay may be more biased towards the stock-aspect of the person factor than tothe flow-aspect. This is because age may have a greater relationship with job experience,which is related to long-term contribution, than with current performance. Therefore,


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Table 1 Elements considered in individual pay determination

Case firm Before change After change

Company J1

All employees Job-related ability,

performance, age

Competency*, performance

Company J2

Manager Job-related ability,

performance, age

Competency*, performance, market rate for

job (for newly-recruited engineer in mid-career)

Non-manager Job-related ability,

performance, age

Competency*, performance age, market rate for job

(for newly-recruited engineer in mid-career)

Company J3


performance, age

Job, performance, market rate for jobs

(for senior manager)

Company J4


performance, age

Job, competency*, performance


performance, age

Job, competency*, performance, Age

Company J5


performance, age

Job, competency*, performance


performance, age

Job-related ability, performance, age

Company J6


performance, age

Job, performance competency*, market rate for each

employee level and job family

Staff Job-related ability,

performance, age

Competency*, performance, market rate for each


Company J7


performance, age

Job, performance

Staff Job-related ability

performance, age


Company J8

Manager Job-related ability

performance, age

Job, performance, market rate for job


performance, age

Job, competency*, performance, market rate for job

Company J9

Senior manager Job-related ability,

performance

Job, performance, market rate for each employee

level and job family

Manager to staff Job-related ability,

performance, age

Job, performance, competency*, market rate for each


Company J10


performance, age


Note: *Criteria for person factor (input aspect of person factor) changed from job-related ability towards

competency profile


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abandonment and reduction of age-related pay is related to a shift from a stock-basedsystem towards a flow-based system.

The third direction concerns the organization-based system. Market pay (market payfor a particular job) is not related to individual pay levels in the Japanese pay system.However, the situation had been changing in the case study firms. Five case study firmsused market pay for at least some employees. Three of the five firms implemented marketpay using market salary surveys. Two of the five firms exchange information about paylevels in each job family and at each employee level with other firms and professionalbodies in their industrial sectors. Among the three firms using market salary surveys onefirm participated in market salary surveys for engineers recruited in mid-career, one firmparticipated in them for senior managers, and one firm participated in them for severaljob families such as researchers and MR (medical representatives).

Compared with the job-based system, market pay is not widespread. According to thecase study firms, the main reason is the difficulty in gathering market pay data. As marketpay is the market pay for a particular job, the spread in use of the job-based pay system isa condition for the introduction of market pay. As regards market salary surveys, theseare a new concept and are not well established in Japan. Overseas-owned consultancyfirms conduct market salary surveys in Japan. Most participants in the surveys areoverseas-owned firms, and their employee size is not large compared with large Japanesefirms. This makes it difficult for large Japanese firms to participate fully in the surveys.

The process of change in Japanese case study firms

Asdiscussed, all three characteristics havebeen changing,while the degreeof changediffersamong the three characteristics. This paper nowmoves on to examine the process of change.Themost significant finding on the process is that the changes in their various aspects did notoccur at the same time, and that the changes occurred as a sequence. For example, CompanyJ6 first changed by emphasizing performance-related pay and reducing age-related paythrough direct links between MBO, appraisals and pay. It introduced job-related pay twoyears later and market pay four years later. Company J8 introduced an MBO scheme thatlinked to performance appraisals and pay in order to emphasize performance for pay.It introduced job-related pay and market pay four years later.

As indicated, the changes started with a policy change whereby the use ofperformance-related pay was increased and the use of age-related pay was decreased.These changes were instigated under a policy of ‘establishing performance-based HRM’.All case study firms emphatically claimed that this policy was a necessary one andcommunicated this to their employees. However, after the change, the case study firmshad problems, since high performers who worked on more difficult tasks than their gradeand pay levels, considered the policy to be unfair. They thought that our firms introducedthe policy as performance-based HRM, but the reality is somewhat different. Forexample, objectives set to higher grade employees are not necessarily more difficult thanobjectives set to lower grade employees, although the objectives are bases for measuringperformance. The case study firms gradually recognized their employees’ dissatisfactionand complaints. In other words, the changes towards performance-based HRM policyrevealed problems. Employees with higher grades and higher pay levels are notnecessary engaged in more difficult tasks than employees on lower grades and lower paylevels. Individual grade levels as a form of shokunou shikaku toukyu (qualification gradebased on job-related ability) are not necessarily consistent with performance level, and infact, large divergences were sometimes found. The main reason for this divergence isseniority-related grade promotion and pay increases in the past.


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In the case study firms, appraisal-related pay increases (satei shoukyu) have been

implemented for a long time. Although job-related ability and performance and pay levels

are not necessarily consistent with each other, stock-based systems can increase the

correlation between anemployee’s ability andperformance andhis/her pay levels in the long

term. Therefore, high performers working on more difficult tasks than their grade and pay

levels would indicate, tended to think that their high performancemight be compensated for

in the long term. But once the case study firms changed their policy toward a flow-based

system, employees are more likely to consider that their performance should be

compensated now. This psychological change in employees resulted in their complaints and

dissatisfaction.To begin with, the case study firms dealt with this problem by changing appraisal

processes to increase transparency and introduce a policy of participation. For example,

the disclosure of rating criteria and rating standards, the introduction of self-appraisal and

feedback on the results of appraisals were all introduced. This is because the case study

firms considered that the problem was that employees tend to perceive unfairness of pay

decisions to be low procedural justice. The purpose of the change was to improve this.After the change in the appraisal policy, some case study firms felt that this change was

not sufficient to resolve the problem, and they realized that a more fundamental problem

was that criteria to determine grade and pay levels under the person-based system are too

general and abstract, which means the criteria have a low level of concreteness and

objectivity. These case study firms considered that the job-based system should be

introduced in order to establish more concrete and objective standards for decision-making

relating to grade and pay levels. After the introduction of the job-based system, three firms

decreased pay levels for employees whose job levels were assessed to be lower grades than

their pay levels, and four firms froze pay levels for those employees. The case study firms

thought that establishing consistencybetweenpay andperformance is necessary inorder that

employees feel that performance-based HRM is fair.The next step was the introduction of market pay for jobs. Once the case study firms

introduced the job factor, linking market pay to jobs could increase the objectivity of pay

determination compared with judgement only by internal relativity. However, the degree

of introduction of market pay is smaller than in the job-based system. The case study

firms expressed difficulty in gathering market pay data under the spread of person-based

pay systems. The widespread use of the job-based pay system in the Japanese labour

market is a necessary condition for the spread of market-related pay for jobs.As indicated, changes to pay systems in the case study firms are sequential. The stages

of change are divided according to the three basic factors of job, market and person, as

shown in Figure 3.As discussed, the change started from a stock-based to a flow-based system, and this

change initiated the introduction of job and market factors. That is, as one part of the

system of internal fit changes, the internal fit breaks and the system precedes the change

towards establishing another type of internal fit. This change sequence found in the case

studies supports the configurational perspective among the three popular HRM

perspectives (universalistic, contingency and configurational). In the case of the change

which was seen in the case studies, the old type of configuration was a person-,

organization-, stock-based system. This old type of configuration is now subject to

change towards a new type of configuration – that of a job-, market- and flow-based

system. Figure 4 illustrates the change in the type of configuration.


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Change in pay systems in the UK case study firms

In contrast to the Japanese case study firms, in the UK case study firms, little evidence

was found for change in relation to the three key characteristics of their pay system: job-,

market- and flow-based systems, although several minor changes within the framework

of the key characteristics were found in the case studies. That is, elements considered for

pay determination are value of job as assessed internally and externally, and individual

performance. These elements remained intact as indicated in Table 2.The case studies found several minor changes within the three characteristics. Three

directions are briefly described here. The first is change in the pay structure. Four case

study firms changed towards a broadly and loosely banded structure. Two case study

firms abolished pay bands corresponding to jobs. They are extreme or more progressive

cases of a broadbanding or loosebanding pay structure. The main reasons for this change

are increasing flexibility and adaptability of pay determination in accordance with

individual performance and market pay. The second is change in the method of pay

Figure 3 Change sequence

Figure 4 Change in the type of configuration in Japanese pay systems


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determination according to a shift in relative importance from internal relativity towardsexternal relativity. In the past, the case study firms tended to focus on internal relativity,and individual pay levels were determined based on the importance of the job, asdetermined through job evaluation. But the focus shifted towards external relativity. As aresult, individual pay levels are determined based on market pay rates which in turn aregathered based on a brief job description. This change reduced the necessity for the time-consuming point-factor scheme. This is the third direction of change; change in themethod of job evaluation from point-factor scheme (analytical job evaluation) towardsnon-analytical job evaluation. In the past, seven case study firms used the point-factorscheme, but only two firms were still using it at the time of the case studies. From thesechanging directions, we can see that the UK pay system strengthens aspects of themarket-based and flow-based system. However, there was little evidence to showchanges in the key characteristics of the job-, market- and flow-based system.

Discussion

As discussed so far, the Japanese pay system has changed its key characteristics. Directionsthe change has taken are toward the UK type of pay system of a job-based, market-basedand flow-based system, while the extent of the change differs among the threecharacteristics. The extent of change from a stock-based towards a flow-based system maybe the largest and the extent of the change from organization-based towards market-basedmay be the smallest. On the contrary, no changes in the UK pay system in terms of the threekey characteristics were found, neither in existing researches nor in the case studiesconducted by the author, although minor changes were found within the framework of thethree characteristics. From this evidence, it can be concluded that the Japanese pay systemis converging partially towards the UK pay system.

The case studies also found sequential change as the process of change. The authordiscussed this change in the pay system in Japanese case study firms as being a change in thetype of configuration of the pay system. That is, a change from a pay system configurationof a person-, organization- and stock-based system towards a pay system configuration of ajob-, market- and flow-based system. This change sequence supports the configurationalperspective among the three popular HRM perspectives. The configurational perspectiveclaims once one part of a configuration gives internal fit (with external fit), the change will

Table 2 Elements considered in pay determination

Case firm Elements considered in the determination of

individual base-pay

Company B1 Job, market rate, performance, competency



Company B4 Job, market rate, performance, competency, multiple

feedback (360-degree feedback)




Company B8 Job, market rate, performance, experience, skills,

knowledge

Note: Information about competencies was not gathered from Company B8


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proceed until another type of configuration giving internal fit is established (with anothertype of external fit). If the configurational perspective is applied, the change in the Japanesepay system will proceed towards a new type of configuration of a job-, market- and flow-based system, which is the UK type of pay system. That is, the Japanese pay systemmay beconverging more towards the UK pay system.

Notes

1 A pay structure is ‘the array of pay rates for different jobs within a single organisation’

(Milkovich and Newman, 2002; 644).2 The main reason for focusing on the private sector is that there are large differences in HRM

including pay systems between the private and public sector in Japan, and most surveys only

target the private sector or the public sector. This research focuses on pay systems in the private

sector according to the situation as it stands in Japan.

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converging or still diverging? a comparison of pay systems in the uk and japan

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