Is the Wage System of Japanese Companies Seniority-based?

Since James Abegglen argued that the wage system of Japanese companies was seniority-based in “The Japanese Factory” published in the US in 1958, the seniority-based wage system has been considered as one of the characteristics of the human resource management in Japanese companies. Also by combining it with the lifetime employment and the enterprise union systems, they have been phrased together as “the three sacred treasures.”

The term “seniority-based” generally conveys an image where the amount of wages is determined by age and length of service. If so, are the wages really determined based on age and length of service in Japanese companies?

I would like to look at this point by taking two workers who joined the same large company as college graduates 20 years ago, as an example. During these 20 years, Mr. A has been successfully promoted and is currently working as the division manager of a small division. On the other hand, Mr. B is slow in climbing the career ladder and has not yet even reached a managerial position. In this case, the difference in their annual salaries would exceed well beyond 5 million yen. Although the gap created each year is not very large, it accumulates every year to make a big difference ‒ that is the wage system of Japanese companies.

I explained in the previous issue that Japanese companies use a membership style of employment. Each employee goes through a reassignment of job ordered by the company every three to five years, resulting in each one having experienced five to six departments after 20 years. During the period, promotions and pay raises as well as bonuses are determined based on semi-annual performance reviews and annual competency appraisals. Even though the salary and the bonus do not increase significantly following each evaluation, the differences steadily accumulate year after year. Thus in 20 years’ time, such annual salary gap between Mr. A and Mr. B as mentioned in the above example would be realized.

Japanese companies do not decide the amount of wages solely by age and length of service. They never fail to evaluate each employee’s contribution to the corporate performance and take it into consideration when they decide wages. Age and length of service are only a part of the elements used in deciding wages and do not weigh a lot. Japanese companies have been taking the method in which they spend many years to confirm their employees’ individual competency and aptitude and to create differences among them accordingly little by little.