Overtime and Oversight:The Organisational Challenges Facing Japanese Companies

Pernille RudlinRudlin Consulting/Japan Intercultural ConsultingJapan Discussion Group October 12th 2007

Agenda

The classic Japanese employment model Changes in the 1990s-2007

Change 1: Recruitment Change 2: Pay Change 3: Performance management

Current challenges Challenge 1: Recruitment Challenge 2: Retention Challenge 3: Overtime Challenge 4: Oversight Challenge 5: Management ability Challenge 6: Knowledge Management

Conclusion & impact on overseas operations

The classic model

Lifetime employment, seniority based promotion and pay

Control through apprenticeship and ‘shame’ rather than checks and procedures and threat of firing

Trust staff who are seishain, lifetime employees, to act in the company’s best interests. Ignore the rest.

0

20

40

60

80

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120

0 5 10 15 20 25

US

UK

Japan

Tru

st

Number of years in the company

1. Changes to recruitment -1990s to 2007 2004 amendment of Temporary Staffing

Services Law Non-regular workers (hi seiki koyou) increased

from 20% of labour force (64m) in 1990 to 1/3 today

Net café nanmin = 5,400 according to one survey, either in 50s or 30s, 60% male

Freeters – 2m? 5m? – getting older NEETS – 620,000 (static, slight decline)

Labour force

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22

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26

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34

1994 1999 2004

Perc

en

tag

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Hi-seishain/non-regular

2. Changes to pay - 1990s to 2007

Making bonus discretionary, introducing performance based pay, clamping down on overtime claims

9 straight years of decline in average annual wage (females and manufacturing sector hardest hit)

Changes to pay - 1990s to 2007

Number of employees with annual wage of < ¥3m rose 1.2% 2007, > ¥10m rose 0.2%

Households on welfare 1.08m, up 3.3% on previous year (2005) – elderly 44%, handicapped 37%, single mothers 9%

More than 19m below poverty line?

3. Changes to performance management - 1990s to 2007 New performance management systems

introduced in most companies c.1995 80% of companies now have a “seika-shugi”

performance based HR system Took 3 to 4 years to have positive impact on

performance of most companies Many companies now “reviewing” their

performance management systems

Challenges

Challenge #1. Recruitment-Talent shortage 1.89 vacancies for every new graduate or

post graduate in March 2007 Set to be 2.14 vacancies for every new

graduate and post graduate March 2008 Employers not happy with quality of

current graduate intake

Recruitment - solutions

Recruit overseas? Recruit mid-career, mid-term? Better utilisation of female workforce? Recruit Freeters

One survey result: 90% of male Freeters, 74% of females would like to gain seishain status

Another survey shows that 75% of male Freeters 18-29 in Tokyo in 2001 tried to become salaried, but in 2006 only 50% did. 75% successful in 2001, 59% 2006 (Japan Institute for Labor Policy & Training)

Recruitment – signs of change

Toyota union admitted 4,000 contract workers with at least one year of service at 12 domestic factories – intends to call on management to improve their conditions and give opportunity to become permanent employees

Complaint filed against Canon by temporary workers

Uniqlo, NTT planning to convert temporary workers to permanent

Recruitment – signs of change

NEC, Fujitsu to employ 1000s of foreign software developers

Tensions surrounding integration of immigrant workers’ families, ‘trainees’

Challenge #2. Retention

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0.95

1

1.05

1.1

1.15

1998

2000

2002

2004

2006

Mil

lio

ns

25-34 yearolds who leftjob within thelast year

Soumusho Labour Survey

2. Retention

Yes

No

Don't know

Don't have aretirement date

Yes

No

Don't know

Don't haveretirement date

20-29 year-olds 30-39 year olds

Do you intend to stay with your present employer until your retirement date? (Nikkei BP Consulting survey 2006)

Challenge #3 Overtime

Average full time employee worked 2,141.2 hours in 2006, up from 2,028 hours in 2005

Government prepared a revision to the Labor Standards Law to increase overtime pay and a new White Collar Exemption bill

Keidanren want exemption cutoff to be employees earning > ¥4m annual income – thought to represent ¥11.6 trillion in overtime pay that would not be paid

Challenge #3 Overtime

Some companies are switching lights off, air conditioning off after 10pm etc

Government inspections have forced back payments

Overtime hours worked in manufacturing sector dropped 1.8% to 15.8 hours for second consecutive month (Oct 07)

Overtime pay increased 1.2% for first time in 2 months (Oct 07)

Challenge # 4 Oversight

Japanese Sarbanes Oxley – naibu tosei, in force from April 2008

Processes and systems throughout the company must be documented, tested and signed off

Oversight - solutions

Hire in overseas experts (securities house) Outsource to professional services

company (car manufacturer) Integrate systems & processes from

acquired overseas company (glass manufacturer)

Japanese staff do it in-house (bank)

Challenge #5 Management ability

Seika shugi helped cut pay rolls in 1990s, but challenge now is talent management (right person for the job, demotion, fair appraisals)

“Are you effectively guiding subordinates?” No = 56.9%, yes 43%

“Are your superiors effectively guiding you?” No= 54.4%, yes = 45.3% (Nikkei survey 2006)

Management ability

Percentage of each age cohort in management positions has declined over past 15 years

Average number of staff reporting to a manager has declined over past 15 years (from 15.5 to 13.5)

Management ability

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18-24

25-29

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55-59

Age

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Have sufficientskills and expertise

Working Person Survey 2004 RecruitWorks Institute

Training investment

1.5

1.6

1.7

1.8

1.9

2

2.1

2.2

2.3

2.4

2.5

Age

Perc

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tag

e Training aspercentage ofpayroll costs

Ministry of Health, Labour & Welfare report

Challenge #6 Knowledge management Rising workload E-mail/mobiles replacing face to face

communication Performance management causing internal

competition Result:

Decline in OJT Less face to face communication Refusal to share knowledge, to protect self

Conclusion 1

“Most Japanese companies seem to be conforming to the accelerating wave of economic globalization. However whether it is R&D, manufacturing or sales, they are remarkably behind in terms of ‘people and organisation’”

Three key words are “trust”, “knowledge” and “motivation”

(Hay Consulting Japan)

Performance management

Management ability

Retention

Oversight

Recruitment

Overtime

Knowledge Management

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Japan

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Number of years in the company

Conclusion 2 – impact on overseas operations of Japanese companies Japanese multinationals operating in Britain have

more autonomy, less oversight from head office than US etc multinationals – because more Japanese in management positions

Invest less in training, less HQ based training More informal in the way information moves around the

company This will have to change?

(Study by Paul Edwards, Tony Edwards, Anthony Ferner, Paul Marginson and Olga Tregaskis , 2007)