Human Resources

Japanese companies were traditionally unique in that they had their own idiosyncratic human resource management systems. Seniority-based compensation systems, lifetime employment systems, and internal promotion systems with almost no hiring of executives from outside were the main characteristics of human resource management in Japan.

During the era of the “lost 10 years” after the collapse of the economic bubble, when Japanese companies went through tough times, many of the larger companies set about transforming their human resource management systems. Since then, the term “seika-shugi” has become widespread in the Japanese business community. “Seika-shugi” refers to the new type of HR management system that is more performance-oriented than traditional Japanese systems. Under this new system, companies base performance-assessment and rewards on business results and personal performance, and not on seniority. Thus, Japanese companies have moved one step toward what is common in the Western business community.

How HR executives see the new system

Last year, the Japan Management Association (JMA) conducted a survey to analyze to what extent and how such performance-based HR systems are being utilized by Japanese companies. The purpose of the survey was to explore the effects and challenges of this new HR management trend among Japanese companies. As Fig. 1 shows, 83% of the participant companies responded that they already had a performance-based HR management system in place.

Figure 1: Introduction rate of "seika-shugi" HR management system (Source: Japan Management Association, 2004)

The survey also revealed that HR executives believe that the new system contributes to the overall performance of the company, although it takes three to four years before the transformation becomes fully effective (Fig. 2). The overall impression is that the new HR system is helping Japanese companies to turn around their performance.

Figure 2: Seika-shugi and corporate competitiveness (Source: Japan Management Association, 2004)

Challenges arising from the new system

The survey also revealed several key issues which Japanese companies feel they need to improve in order to make this new system more fruitful. As Fig. 3 shows, the three areas in which there are the biggest gaps between “ideal” and “reality” are:

• assigning each talent to the most suitable job,
• effective implementation of demotion when necessary, and
• ensuring that performance appraisals are fairly conducted.

Figure 3: Gap between ideal and reality in HR management (Source: Japan Management Association, 2004)

Interestingly, all the issues that HR executives feel they need to further improve are related to “talent management”. As a result of the advent of the performance-based system, Japanese companies need to handle talent management more effectively than ever before.

Implications of the recent changes

I can think of several implications of the recent transformation in Japanese HR management:

First, the transformation revealed that the critical part of HR management is talent management and not performance-based pay. HR executives at Japanese companies feel it is more and more important to make sure that each talent in the company is assigned to the most suitable job.

Secondly, it takes time for the new HR management policies to take effect in the organization. Fig. 2 indicates that any new initiatives in HR management policies need time to become embedded into the organization. While one could argue that Japanese companies are very slow to change, it is fair to say that taking time is important for any HR management transformation, given its impact on the behaviors and performance of employees.

Lastly, Japanese companies that have recognized the importance of talent management will now move on towards the next step. So far, their transformation has not included aggressive hiring of executives from outside. However, this will also change. The mobility of labor among the younger generation is increasing. Those who do not feel they are assigned to suitable jobs are exploring outside opportunities. It is likely that the same will happen at executive level. And so this small island country that has enjoyed a peaceful lifetime-employment system for so long, will soon be feeling the impact of the real “war for talent”.