Concepts of Compensation Systems
Generally, there are four ways to determine compensation.
Compensation based on position (position-based pay)
Compensation based on job content and difficulty (job-based pay)
Compensation based on ability (competency-based pay)
Compensation based on results (performance-based pay)
It is important to consider how to balance these four compensation systems.
While position-based pay has the effect of motivating members to 'want to attain a higher position (as salary increases with higher positions),' it tends to make personnel decisions subjective and create a sense of unfairness. Furthermore, those who attain such positions often rest on their laurels, and there is a risk that criticism of superiors can escalate into criticism of the company. Some companies attempt to trade off position-based pay against overtime pay by designating those above a certain rank as 'managers and supervisors.' In the long run, this may diminish the appeal of those positions.
Job-based pay is a compensation system based on the idea that 'anyone doing the same job should receive the same salary.' Differences in salary are determined based on the content of the job, its difficulty, and the scope of responsibility (weight of responsibility). Therefore, while it is certainly fair, it makes it difficult to judge the right person for the right job, and those who feel they are not suited for their role will request a transfer (or in some cases, resign). Moreover, to maximize the benefits of job-based pay, the company must have multiple job categories open, which often makes it difficult for small and medium-sized enterprises specializing in a single business to set up effective job-based pay.
Competency-based pay is based on the idea of evaluating the 'abilities necessary for job performance' among people in the same role and reflecting that in their compensation. In a sense, it is the idea of paying for the 'expected contribution to the company's strategy and plans.' Since this can eliminate the concept of seniority, it can be expected to have the effect of increasing the motivation of younger employees or those with less work experience. On the other hand, such contributions are merely expectations, and depending on market or internal conditions, they may not lead to immediate results. Therefore, personnel decision-makers are required to have the ability to properly assess an individual's capabilities.
Performance-based pay is, as the name suggests, a method of determining salary based on an individual's results (achievements). The annual salary system for professional baseball players is a prime example of this. While it can be a highly motivating compensation system for some, it creates dilemmas regarding how to evaluate employees in back-office departments. Additionally, because it can easily foster a mindset of trying to outdo others, there is a risk that it will lower team cooperation.
I believe most companies in Japan determine salaries through a combination of the four compensation systems mentioned above. What must be added to this are the company's own corporate philosophy and medium- to long-term plans.
A company's gross profit varies depending on its business model, market environment, and position within the industry. Differences in gross profit lead to differences in available selling, general, and administrative expenses, which in turn affects the personnel costs that can be distributed to workers. This creates differences in annual operating (ordinary) profit, which leads to the manager's vision of what kind of assets will be left on hand in the future.
Compensation systems should not be thought of in a myopic manner.