Performance-Based Wages and Employee Health

Yukiko Saito, Senior Associate
Toshiaki Kouno, Senior Associate

August 9, 2011 (Tuesday)

Introduction

These days, the baby-boomer generation is reaching retirement age and the labor population is gradually declining, forcing corporate executives to face the pressing issue of maintaining and managing human resources. Building up human resources is not only directly connected to business performance through improved labor productivity, it is a large issue that affects business sustainability too. As such, when it comes to strengthening human resources, maintaining employee health is an important issue on par with employee education.

At the same time, the business environment of Japanese companies has changed greatly, and short-term results are now sought after. The employment system has changed from a promotion-by-seniority type system with the guarantee of lifetime employment to a performance-based wage system, thus causing an increase in intra-company wage inequality. Higher-ups must grasp the effects of such an environment on employee health and rethink their management methods from a long-term point of view.

Changes in Employment Environment

In recent years, the business environment of Japanese companies has changed significantly. Developments in globalization and dissolution of share cross-holding have brought about changes in shareholder structure. As a result, short-term results are more sought after by management than long-term ones. The employment system has also changed from a promotion-by-seniority type system with the guarantee of lifetime employment to a performance-based wage system. Intra-company wage inequality—especially intra-age inequality—has increased.

Figure 1 shows changes in wage inequality using real data from a large number of companies. We see that during the observation period from 2003 to 2007, intra-company wage inequality increased in almost 70% of companies. While 60% of companies decreased inter-age wage inequality, almost 80% saw an increase in intra-age inequality.

In the past, Japan’s wage system was one of promotion-by-seniority, and consequently a company’s intra-age inequality was small and its inter-age inequality large. The results seen in Figure 1, however, suggest that we have diverged from the old wage system and that the introduction of performance-based wages has advanced apace.

Social Environment and Health

In the field of social epidemiology, the effects of social environment on health have been identified and much regional research performed. Existing studies in social epidemiology confirm that regions with high wages and regions with less wage inequality have healthier residents.

We regard workplace environment as a social environment, since an employee’s ties to his or her workplace are stronger than those to the region in which he or she lives, and therefore it can have a significant effect on health. Furthermore, we regard wage inequality as part of the workplace environment. It is important to grasp how being faced with the above changes in the wage system will affect the health of employees.

While performance-based wages systems are said to be useful as incentive mechanisms, many harmful effects have also been identified. It is entirely possible that one of these harmful effects is related to employee health. We verify below the possible effects of such wage systems, as a factor of social environment, on employee health.

Analysis Method and Results

We herein introduce the monthly report data from health insurance societies used in our analysis of the relationship between workplace environment and employee health. Most health insurance societies are composed of only a single company. Monthly reports for 1500 health insurance societies from 2003-2007 were obtained through a release of information request submitted to the Ministry of Health, Labor, and Welfare.

Using these data, we were able to create Figure 1, which shows intra-company wage inequality, and measure indicators which show workplace environment and employee health. Intra-company wage inequality is measured from the distribution of standard monthly salary, and the employee health indicator is measured by long-term leave of absence rate and mortality rate(1).

The results of the analysis confirm that there is indeed a strong connection between workplace environment and employee health. The greater the intra-age inequality within a company is, the worse the health of its employees. This suggests that the introduction of performance-based wage systems has adverse effects on the health of employees.

Health and Productivity

For company executives, managing employee health is an important issue from the perspective of improved labor productivity and human resource maintenance and management. Not only does an employee missing work or taking a leave of absence reduce productivity, but if an employee comes to work in poor health, he or she will be unable to concentrate and work efficiency will decrease.

In the Japanese management system of the past, securing human resources based on lifetime employment was the foundation for long-term growth. Maintaining and managing human resources is very important for a company’s long-term growth, and now that the baby-boomer generation is nearing retirement age and the labor population is decreasing, that importance grows ever greater.

The results of our analysis suggest that performance-based wage systems, which are introduced with short-term goals in mind, are harmful to the health of employees. In order to maintain employee health and realize long-term growth, it is time to re-acknowledge the merits of Japan’s traditional management structure.

Notes

(1) Rate of long-term leaves of absence was calculated from rate of pay of disability benefits to insured persons who are not compensated for illness-related long-term leaves of absences. Mortality rate was calculated from rate of pay of funeral fees for insured persons who died.