Trends Analysis in Japan: The Rise of Total Rewards

Demand for Total Rewards and Compensation & Benefits professionals is continuing to rise in Japan. For experienced practitioners, it’s an opportunity for career development and salary advancement.

The desire for bilingual talent remains high across the full spectrum of HR disciplines, with many candidates receiving multiple competitive offers. This demand has been driven by numerous factors, including increased investment, globalisation, historical and cultural workforce trends, and post-Covid future of work planning.

As a result, it’s placed transformation (managerial, structural and cultural) and change management initiatives high on organisational agendas, and put people with relevant experience centre-focus.

Global Organisational Structures

We’ve seen global firms accelerate their integration of Japanese subsidiaries – which often operate relatively independently – more firmly into their global organisational structures. In turn, local and centralised reporting structures are increasingly being replaced by functional COE and matrix reporting lines, rather than directly reporting to the local Head of HR.

Historically global companies have seen APAC (ex-Japan) organisational structures and we are seeing an increased move away from this with Japan operations being integrated more firmly into the APAC or Global reporting structures. Again, this change is driving an increased need for skilled and multi-lingual candidates especially those with global experience. Whilst fluent Japanese ability is still highly desired,  increasingly we are seeing a trend of organisations hiring global or overseas talent, and assigning interpreters to work alongside them.

Those with experience in Japanese and global firms are particularly desirable to hiring organisations as they possess essential skills. These include having a strong understanding of cultural sensitivities, local regulations, and HR policies, as well as knowing how they interact with global business practices and expectations.

Annual Compensation Structures

C&B professionals are in high demand globally but especially here in Japan because we’re seeing a move away from traditional salary structures towards performance-based pay. It’s a shift that’s been encouraged by traditional Japanese organisations that are striving to remain competitive in attracting talent from global organisations.

Yet a challenge that comes with this change is the difference in annual compensation structures. While the theoretical total annual compensation may be the same, traditional Japanese compensation structures often have a lower monthly base salary, with summer and winter bonuses accounting for a significant portion of the total annual compensation package.

Consequently, employees coming from foreign capital firms may see an initial reduction in their monthly cash flow during the first six to nine months before bonuses kick in. Unsurprisingly, this has been a significant factor in how successfully some organisations are in attracting and securing talent.

Traditional companies also often have seniority-based reward structures related to the lifetime employment model. Promotions, and thus salary increases, are directly related to length of service rather than performance and ability.

Career Development and Talent Retention

Talent tends to move from one discipline to another within traditional Japanese businesses, usually at the organisation’s instruction. For example, an employee may start as a graduate in sales, before transferring to various corporate functions. They will remain within the same company for life.

Whilst many companies are moving away from this generalist approach to career development, it contrasts to more specialist approaches seen elsewhere. In other countries, it’s more common for individuals to remain in one discipline but move companies regularly to secure career advancement. This is also a contributing factor to the lack of talent with specialist skillsets.

When hiring for mid-career positions requiring a specialist knowledge, understandably, hiring organisations often request applicants have three to five years of experience in a particular specialist area to qualify. However, by the time individuals have this level of experience, they’ll be looking to gain experience in a new discipline to advance their career as an HR Business Partner or HR Director. So, while candidates may have the required skillset it’s challenging to entice them to apply for a similar role.

As a result, organisations that can offer internal mobility opportunities to help employees acquire the necessary skillsets to develop their careers – even if that is in preparation of a move outside of the current organisation – are in a strong position to attract talent.

Pay-For-Performance Compensation Structures

It’s been widely reported that major Japanese firms, including Hitachi, Fujitsu, Toyota, Panasonic and Recruit, intend to move towards a pay-for-performance compensation structure. It’s likely due to the traditional seniority-based compensation system contributing to a reduction in per-capita productivity.

The shift is a bid for organisations to remain competitive by rewarding and motivating the best talent. It’s essential for securing organisational performance in increasingly competitive business environments.

We’re currently working with numerous clients are making this exact change. It’s a transition that’s often long and complex, requiring detailed planning, extensive negotiations with unions or employee representatives, and well-executed communication strategies.

Flexible Working Policies

Global events have rapidly shifted traditional employment relationships, with employees seeking more flexible work policies and rewards structures. We continue to see “enhanced compensation and benefits programs on offer,” as ChapmanCG recently reported in our Q1 Global HR Outlook.

At the time of writing, for example, Hitachi has just announced introducing a 3-day weekend system which allows employees to work the same weekly hours over a shorter working week – and with greater flexibility – without taking a salary reduction.

Having a competitive rewards strategy that provides benefits that are truly valued by employees has become vital in attracting and retaining talent in this increasingly competitive market. It can often be what makes an employee stay, despite the option to change employers offering a faster way to a significantly increase salary.

(Employer branding is another essential component to this but I’ll explore that in more detail in a forthcoming article).

Technology Investments

Embracing technology is another important component for remaining competitive in the Japanese market. Dee Karsan and Ringo Lau, Directors at ChapmanCG, summarised it perfectly in their recent article, Keeping Up with Tech: Preparing and Empowering. “Never before has it been so important for HR practitioners – regardless of their specialisation – to be tech-savvy.”

This is particularly true for C&B and Total Rewards professionals. An increasing number of our clients are accelerating their adoption of enterprise software and ERP systems, especially among global organisations who are integrating their Japanese operations into their global reporting infrastructure.

As a result, rewards specialists with experience in system implementation such as Workday, Success Factors, and Oracle are increasingly sort after.

Economic and Social Factors

Late last year Prime Minister Fumio Kishida requested companies to voluntarily increase their salaries by 3% to help foster economic recovery. It’s an uncommon occurrence for the government to set a specific target.

Average salaries in Japan are comparatively low to those in their OECD counterparts (this isn’t necessarily true for bilingual and globally experienced talent who can artificially increase salary levels for like-for-like roles). At the time of writing there’s high inflation, a weakening yen, and dramatically increasing living costs. Japan also has a much larger gender pay gap. In 2021, research showed this to be approximately 30% placing Japan behind many of the G7 countries.

Designing policies that factor in these challenges is essential to providing the fair, competitive, and motivating rewards structures that galvanise organisational competitiveness. It really underlines the importance of having suitably qualified and experienced Rewards professionals at the heart of people policies.

If you’re an HR practitioner and interested in discussing the current market trends, career opportunities, or your organisation’s hiring needs you can contact me or Dee Karsan anytime.

You can see an overview of our current executive searches in Japan here.