From Seniority to Performance Principle: The Evolution of Pay Practices in Japanese Firms since the 1990s

After the burst of the bubble economy at the beginning of the 1990s, pay practices in Japanese companies have undergone significant changes that are characterised by a shift towards performance-based pay. The purpose of this article is to take account of these changes through an analysis of key research and survey results, to discuss the degree of success of the new systems and to examine some important interdependencies with changes in corporate governance and labour legislation. The success of the evolving systems in terms of increased efficiency and effectiveness remains contested, while many companies are still adjusting their understanding of performance and their assessment procedures so as to not negatively impact employees’ motivation and cooperative work practices. While the influence of corporate governance on pay systems remains limited, recent changes in labour legislation are likely to strengthen the reliance on performance-oriented pay in the future.