"Incentives Offered to Boost Employee Achievement"... Japanese Companies Tie Executive Bonuses

Major Companies like Hitachi Seisakusho and Idemitsu Kosan Adopt Measures
Revamping Atmosphere Amid Frequent Resignations Due to Low Birthrate and Aging Population

As interest in human capital as a factor in corporate value creation grows, a trend is spreading in Japan to link 'engagement,' which refers to employee participation and commitment, with executive compensation. The intention is to motivate executives with bonuses to enhance workers' enthusiasm, thereby improving corporate productivity.

On the 8th, Nihon Keizai Shimbun (Nikkei) reported that Hitachi, Ltd., Japan's largest electrical and electronic equipment manufacturer, and energy company Idemitsu Kosan have introduced such a system into their executive stock compensation criteria starting this year. The railway company Keihin Kyuko also plans to link this to executive bonuses.

Hitachi, Ltd. decided to link about 10% of the stock-based additional executive compensation to the achievement rate of the medium-term management plan goals for the next fiscal year. One of the goals includes 'employee engagement.' If the positive response rate from employees to four questions about fulfillment and sense of achievement exceeds 68%, they will receive a bonus.

Idemitsu Kosan also decided to link 20% of the performance-linked stock compensation for directors and other executives to engagement starting this year. This system is scheduled to be officially introduced after approval at this month's shareholders' meeting. The level of linkage will be determined by how much the engagement goals are achieved. In other words, compensation will be decided based on how much executives have stimulated employees' work motivation and encouraged active participation in their duties.

Engagement refers to a state where workers have passion for their work and a willingness to contribute to the organization. Since the 2000s, it has been recognized in Europe and the United States as a factor that enhances corporate productivity. The introduction of this system by Japanese companies appears to be influenced by Japan's relatively low work motivation compared to other countries, as well as the social background of low birthrates and an aging population.

Nikkei stated, "According to a survey released last year by the U.S. polling organization Gallup, the percentage of employees feeling engagement in Japan is 5%, significantly below the global average of 21%," adding, "In a situation where labor shortages are intensifying due to low birthrates and aging, neglecting employee engagement leads to higher turnover rates, which disrupts work."

Among Japanese companies that introduced the system earlier, there is a trend to strengthen it by increasing compensation and subdividing indicators. Japan Persol Holdings, a human resource management company, will raise the engagement-linked ratio in stock compensation from the previous 5% to 20% starting this year. Ajinomoto, a food company that introduced the system in 2020, increased the engagement evaluation indicators from one type to nine types to reflect them more precisely in compensation.

Nikkei also added that employees' work motivation and corporate growth rates are actually proportional. Citing a 2017 survey by Japanese talent consulting firm Link and Motivation (LM) targeting about 200 companies in Japan, Nikkei reported, "Companies with high employee engagement tended to show higher sales growth rates and net profit growth rates the following year," and "In the subsequent survey, it was found that when employee work engagement improved, operating profit margins also increased during the same period."

This content was produced with the assistance of AI translation services.