HR System for the Realization of Work Style Reform “Three-layered System” to meet diverse values
Satoshi Tachibana, ERIS Consulting, Japan
Employees will be able to realize a vivid way of working only based on autonomy, with true self-motivated as well as true freedom of choice. The purpose of new policy of “work style reform” launched in Japan currently is to enable a variety of ways of working by empowering employees to make a choice. In order to give diverse options to diverse values, it is difficult to deal with the current way of “one company one single system”. Human resources and personnel systems formed from multi-layered appraisal and wage structure aim to meet the needs of the times, that gives freedom of choice to various ways of working. As such, in responding to these challenges, an originally devised “Three-layered System” is presented in this report, that has been implemented successfully in over 70 Japanese corporations based in Asia.
● Introduction, Research review and methodology
The “diverse work styles “, as the core of current Japan’s “work style reform”, has remained on the surface discussion such as, diversification of employment covering permanent employees, semi-regular employees and temporary employees, categorizing of highly skilled professionals and regular staff, permission of second job or concurrent holding of positions, flexibility of working hours and its management, balancing work sharing at workplace, etc.. It is difficult to expect remarkable effectiveness and radical advances unless touching on essential parts and structural problems. It seems that it is such a present situation. Therefore, it is an urgent task to draft and propose an effective system that identifies essential issues based on the structural dimension.
The next challenge is the artificial obstacle accompanying the implementation of the system. In other words, it is a sensitive issue that affects the group of vested interest of human beings. Even if there is a draft of institutional reform itself and effective ideas come out, that conflict occurs with vested interests is still unavoidable, as it is a reform. Reform always meets with opposition and various forms of disruptive behavior come from the vested profit group in any country in the world. Since the vested profit group often holds the real power, it can easily disturb or even smash the reform. As such, it is important that we shall never rule this anti-reformist into evil. If we stipulate it as evil, hostile relations are established, conflicts arise, institutional reforms will eventually fail. The loss of harmony among people never meets the Japanese values. The solution is that every effort is required to maintain the profit of the vested interest group as far as possible and not to immediately remove these benefits by the revolution. Considering the interests of each party, we must make an approach towards soft landing. This is a more challenging task.
What is “Three-layered System”(in Japanese, Sankaidate or Sangaidate)? As a conclusion, this original concept will appear in various forms covering human resources management, such as personnel system, labor contract, wage system, evaluation criteria, management model, choice of work style and employment status. In short, it is a comprehensive concept and system of infrastructure for various ways of working, or management related to human beings. To dig deeply into the details of the item-by-item discussion with its versatility, compatibility, extensibility, it extends to a long talk. Due to the limited space, this report will only present a brief outline with general framework.
The motivational origin of this research was the loss of flexibility in the personnel system of employers including Japanese companies in China. With the implementation of the Chinese Labor Contract Law in 2008, employers practically lost substantial power for dismissal as well as authority to manage personnel affairs, when labor disputes increased rapidly. The statistics of labor disputes of Japanese companies based in China taken from 2008 to 2017 at ERIS Consulting, show the trend of that the majority of labor disputes were caused by managers rather than regular employees working at the front lines. “Protection for weak”, the purpose of the labor law had become “protection for strong”. The cause is that the new law gave all employees indiscriminate protection.
Based on this hypothesis, we tried to put a view on the fact that labor law exists as a law that coexists while having the distinction between public law and private law. In which area, some previous research, such as Klare (1982), and, Yoshimura (2007) showed abundant studies and suggestions. Most of these previous studies were, by their nature, specialized studies in the area of legal theory, so they did not actively work on practical solutions from a cross-cutting perspective with personnel and labor practice areas.
The conflict between individualism of civil law and collective control based on labor law then became the priority viewpoint of the problem solving. Specifically, it is a mixture by “principle of private autonomy” in the civil law, and, “protection for weak” coming from the labor law. Despite having a legal concept, at the time of research there were certain peculiarities, as socialist countries such as China and Vietnam were targeted. It is indiscriminate employee protection. The China Labor Contract Law, which came into effect in 2008, had an impact on the industry. There were also many studies on this, such as Dong (2016) , Zhao and Zhang (2010).
Based the previous research mainly the above two areas, we started to study on construction theoretical and practical models in personnel management. By applying certain operation rules to the multi-layer part formed from the cross of the two laws, and reflecting it in the personnel structure within the company, it was hypothesized that could lead to the solution of the problems. The hypothesis was named “Three-layered System”, which was initially “Two-layered” in 2007, and later revised to “Three-layered” around 2010.
Since then, the “Three-layered System” personnel system has begun to be introduced mainly to Japanese companies based in China, later from 2015 it has also been introduced to Japanese companies in Vietnam. The Vietnamese labor law closely resembles the Chinese labor law, causing companies to lose flexibility in human resources management, by severely restricting power for dismissal as well as authority to manage personnel affairs.
In those countries with general freedom of dismissal systems such as, not only United States, but also Hong Kong and Singapore in Asia, a simple wage structure with single layer of fixed annual salary is probably sufficient rather than making it complicated like “Three-layered System”. And, for those countries under the legal system focused on severe layoff regulations, the multi-layered employment and wage structure like “Three-layered System” will achieve flexibility. If this hypothesis established, it is inferred that the application in the Japanese labor market with “doctrines of abuse of rights of dismissal” may also be possible.
This research was carried out on case-study basis at Japanese companies based in China and Vietnam over the 10 years from 2008 to 2017. Due to the nature of the project, it was difficult to take a quantitative approach to collect a large volume of data and derive a generalized rule by statistical processing. Practically, in terms of the number of companies, the number (72) of introduced companies are quite limited samples.
The case-oriented approach seems to be more suitable because the system in the enterprise organization is targeted as the main research target. When researching business administration, including organizations, it was thought that an approach of case study could have sufficient significance as a method. In other words, it was a case study in which we tried to capture reality by mainly synthesizing and interpreting qualitative data, consisting of the characteristics of limited cases and the various contexts surrounding them. The primary focus is on the limited number of study objects in the few cases, and a deep multifaceted analysis, which cannot be covered by statistical studies.
● Essence of work style – diversity and choice
Work style reform is to enable various ways of working to coexist. First of all, it is indispensable to check the current status of how employees have the option of choosing under the existing corporate personnel system. Furthermore, what is the choice, what kind of choice is made, how to choose it, and the most important points are, what the result of the choice is, how to accept them.
In Japan recently the word “self-responsibility” does not sound positive. “Self-responsibility (In Japanese, Jikosekinin” born under the freedom of widespread choice is to be aware of the risk, that is, the possibility of disadvantage. In the country of Japan, it is said that the establishment of individuals lags behind. Many people leaned toward an unselected peace of mind and comfortability rather than freedom of choice, entrusting themselves to the success (sometimes actually failure) of the community. Therefore, it has sense of incongruity in self-responsibility, causing an allergic reaction to its acceptance.
We are not in a position to criticize this, because itself is a kind of freedom of choice to choose “abandon the freedom of choice and choose the peace of mind of not-select”, which should also be guaranteed. Has the current personnel system of Japanese companies so far guaranteed the coexistence of a wide variety of values and provide options of diverse working methods based on these values? Generally speaking, the answer is probably “No”.
Employees are not entitled with freedom of choice, or in some cases only a part of it can be granted. At this time, performance deterioration appears certainly, due to lack of motivation as a rational economic person. First of all, did employees choose their own option to work in a company by their own will? secondly, what kind of company, and which company to choose to work, furthermore, what kind of work style to choose, and finally, how to accept the results, various tasks are existing.
Human resources system that gives various ways of working and freedom of choice is a request of the times. Now, “Three-layered System” is in a position to try to respond to these challenges.
● Legal background
The origin of this research was the loss of flexibility in the personnel system of Japanese companies in China. China drastically revised labor law in 2008, by enforcing its new Labor Contract Law, which totally regulates the employers on substantial power for dismissal as well as authority to manage personnel affairs, when labor disputes increased rapidly. According to the statistics announced by Shanghai legal authorities, there were 964,000 labor dispute cases with conclusion of trial in 2008 in the region, almost doubling from 500,000 in the previous year (Source: China LabourNet, accessed on 15th January 2012, http://www.labournet.com.cn/ldzy/ckzl/t20.asp).
According to the case data base of ERIS Consulting, it covers 749 cases (including multiple cases in same company) of labor disputes of Japanese companies with between 2008 and 2017. 651 cases (87%) were disputes over dismissal, wage adjustments, transfers, job assignments etc.. Furthermore, among the 651 cases, 601 were claimed by middle or higher managers, accounting for 92%. The labor contract law, which focused on front-line worker protection, conversely resulted in a sharp increase in labor disputes, and in addition, middle or higher level managers were in dispute. “Protection for weak”, the purpose of the labor law had become “protection for strong”. The cause is that the new law gave all employees indiscriminate protection.
As an evidence supporting this hypothesis, when the Supreme People’s Court of China promulgated “Guidelines Opinion on the Implementation of the Tribunal of Labor Dispute Cases under the Current Situation” (Legal  No. 41) on 6th July 2009, the chief of the first civil court commented to the media interview as follows (comment excerpt).
Since the Labor Contract Law and the Labor Dispute Arbitration Law came into force last year (2008), many workers use the laws as sharp weapons to claim their own interests, in order to resolve the conflicts between the employees and employers. The types of labor dispute cases have become more and more complicated day by day, and it has become increasingly difficult for the People’s Court to examine labor dispute cases.”
As such, many workers used the labor law, the legal tool of “protection for weak”, as sharp weapons to attack their employers for gaining extra interests and benefits. In other words, it is inferred that labor law as a social law (intermediate law between public law and private law) intervenes too much in the area of civil law covering employment relations.
However, the labor law itself will not solve the problem unless it is revised to weaken the above-mentioned intervention. In the face of this reality, we had to make appropriate adjustments to the corporate personnel system to secure the employment diversity and flexibility.
As legal background, we tried to make such a hypothesis. Employees are not so simple to be put in a single group. Depending on their wages and position status, low-income field workers and high-income managers must be divided into different groups based on certain criteria or particular benchmarks. And labor contracts and wage structure are required to be set up accordingly. While completely applying labor law protection to field workers, the wage of high-income managers are divided into multiple layers, and apply the labor law in their base level, but the upper level applies not the labor law but the “principle of private autonomy”, based on an equal relationship between the two. In other words, it means to apply the labor law and civil law based on multi-layered application (mixed status) to different employee groups.
In addition, under United States law, the term “labor law” often refers to laws governing trade unions, collective bargaining, and other issues related to trade unions. The term “employment law” refers to all legal issues concerning the relationship between employers and employees.
Therefore, the multi-layered application (mixed status) in China mentioned above reflects the basic idea of US law. In China, the base level of the system governed by the labor law, is linked to the labor union, and the base wage of this level has been set for the targets of collective bargaining.
● Infrastructure of work style – Basic philosophy of personnel system and labor contract
Employer creates a personnel system, in order to employment and manage employees. The fundamental basis of the personnel system is a labor contract and/or a employment contract. When a worker with diverse values and work perspective enters the company, he or she is required to sign a labor contract based on the personnel system of the company. However, the question is, can a single personnel system and labor contract fully meet this diverse range of values and career requirements.
Labor contracts have two different values. One is the value based on justice (objective order) in law. The other is value based on contract freedom (autonomy). A labor contract that interwoven these two values must adjust the ratio of the two values. Some workers seek more guarantee, and equal wage distribution, while some workers are willing take more risks in taking up challenging tasks and seek higher return potentials rather than those guarantees and equalities.
Since the ratio of the weights of these two values varies depending on the individual employee, the adjustment function of the gradation is necessary. However, in a single form of labor contracts and personnel systems, it is obviously impossible to respond to the diversification of those needs. If we do not resolve this current dilemma first, realization of diversity of values and work style will be an impractical proposition.
The core of labor contracts is the relationship of rights and obligations between provision of labor or labor results and compensation payment. It is the philosophy of wage distribution to support this relationship. An employer is always facing the task of distributing wages from the limited management resources to employees based on what philosophy and rules are used. We can make two points of discussion below.
As the first point, what must be raised before discussing the principle of distribution, is the intersection and fusion of public and private laws. In the first place, the question is, what is the relevance of introducing distributed right (the rightness), which is society-based public law justice, while contract is in the private law area? In the sense of law ethics and socialization, the integration of public law and private law progressed, and the phenomenon that distributive justice strengthens its influence into the private law field of contract is appropriate.
At the same time, the notion of procedural justice is introduced. It is to avoid the asymmetry of the position of strength and to raise the probability of deriving appropriate conclusions through procedures such as collective bargaining rather than negotiation between individual employees and employer. This is aimed at realizing the basic rights of employees, and it is done with the intervention based on labor law which is positioned close to public law. Therefore, if it is intended to realize higher-level interests beyond the extremely basic rights of employees at this level, the intervention of public law immediately loses relevance.
The second point is on examining the basic principle of distribution. The basic principle of distribution is divided into a needs principle, an equality principle and an equity principle.
The first “needs principle” is to distribute the amount required for the actual lives of individual employees. For example, employees with households need more living funds than single employees. Should the demand elements of such individual employees be considered? The lifetime employment system in Japan is a standard system that incorporates lifestyle patterns and necessary funds based on different life stages of employees. There is certain rationality, however conflicting parts occur with the other two principles, and the scenes to be criticized are also increasing. Recently, performance-based systems deny the needs principle.
The general denial of the needs principle is difficult to be accepted. For example, older employees who have contributed for employers for many years are sometimes placed in a disadvantageous position, if there is a decline in physical strength or intelligence. This can also lead to a decline in the long-term contribution motivation of employees. Therefore, it will be necessary to incorporate some needs principle. By making full use of the “Three-layered System”, it is possible to solve this problem by selective type permanent work allowance as a typical solution example in the person-attached part (in Japanese, Zokujin).
The second “equality principle” is to distribute equally. This is extremely natural in terms of the basic life security of employees. However, deserving special mention is that it is not an indiscriminate even distribution on the basis of simple wages total.
In accordance with certain rules based on equality principle and needs principle, it constitutes the basic part of wage, that is, the first level of the “Three-layered System”, as a combination of the person-attached elements.
The third “equity principle” is to distribute outcomes according to individual contribution degree. This has the universal value of the current personnel system recently, mainly be seen in most developed countries except Japan. Among diverse values, we must pay the highest respect for presenting the outcomes of outstanding human resources, and pay compensation for that labor or outcome. However, in order to avoid overall extreme ups and downs, precise work is necessary for establishing institutional shading in this compensation part.
As an interim guidelines, we can see that the basic distribution principle has its purpose and significance, as such, the way of picking one up and throwing another one away, is not correct. In other words, there is no absolute right and wrong in each other. With this in mind, we hereby propose policy and system reform for the labor market in Japan, based on the concepts stated as follows.
1. Institutional remodeling must be designed by focusing on the employment customs, cultural characteristics, orientation preference of employees, etc. in Japanese society, taking into consideration individual values and work scene consideration, in particular, the choice of freedom and activeness of individual employee’s life stage.
2. In order to strive to achieve coexistence and prosperity as a win-win basis for both “A and B” as much as possible without discarding “A or B”, including a variety of benefits covering multiple parties, replaceable “add-on options” are probably realistically workable.
● Concept and framework of “Three-layered System”
“Three-layered system” is a backbone concept which covers a myriad of patterns depending on functions such as employment practices, the current state of the labor market, the unique culture, and the specific circumstances of each company. Even if there is a reference model in outline, it will be formed into various different shapes by design work depending on actual situations. A basic bird’s eye view of the three levels is hereby presented as follows.
In many companies, wages are described as a single level, but in the case of three levels, the wage structure is basically divided into triple layers.
The first level (ground level) part is positioned as “Pay to Person”. To put it this way, it can be said that it is a personal benefit appears as personal-attached. It is basically uniformly equally paid to all employees enrolled in a company. As wage benefits accompanying the existence of labor relations are based on statutory requirements, it can be considered that the color of security is permanently guaranteed and basically not available to reduce. For employees who emphasize employment security, this first level part is an important and primary source of income.
Next, the second level part. This part is positioned as “Pay to Position”. It is a wage paid to a particular position, in which an employee has been assigned or nominated by the company. This wage is paid to a position itself instead a person, as an add-on level up to the first level. This second level is existing on a position-attached basis rather than the personal-attached first level. A particular note is that the second level is to give priority evaluation of the eligibility at the location (position).
Furthermore, the third level part is positioned as “Pay to Performance”. This is completely dependent on the actual outcome. The relevance to the position eligibility of the second level part is not necessarily existing. It is a part that fairly evaluates and gives benefits to the results cited in a certain position such as managerial positions, even though it is a staff or a specialist.
“Pay to Person” “Pay to Position” “Pay to Performance” is the “6P principle”.
For example, as a manager, or those employees who emphasis promotion-oriented focus on the second and third level, while those highly skilled employees or specialists but not suitable for managerial positions, are focusing on the third level for their excellent outcomes. Also, for the employees who desire stable employment rather than taking risk by taking up challengeable jobs, he or she can put the value mainly on the first level to step his or her own stable career. The system allows employees to make choice from various options, and to make combination of the options.
Looking at the “Three-layered System” from a financial view, labor cost, generally belonging to fixed costs, are broken down into three layers of, fixed costs at the first level, semi-variable costs at the second level, and variable costs at the third level, not only improving labor productivity, it also helps to reduce the financial pressure on corporate management and makes it possible to realize the management achievements of building a stronger financial structure. In preparation for the future AI (artificial intelligence) era, it can be said to be an institutional structural infrastructure that is indispensable for ensuring the flexibility of employment and wage systems.
The concept of “Three-layered System” basically has high versatility. It is a concept of system that is applicable to any company in most Asian countries. It is also suitable for operation as a global standard in tackling the unification of personnel systems of Japanese companies and their overseas bases. On the practical side, however, regional optimization work is indispensable, because it receives some restraint from aspects such as local labor policy and law systems, employment practices and unique culture of each country.
The following are data of the 72 Japanese companies that have already introduced “Three-layered System” in China and Vietnam. As all companies are local non-listed companies, the data are limited.
1. Parent company classification: 69 local subsidiaries whose parent companies are listed company in Japan, 3 local subsidiaries whose parent companies are non-listed company in Japan.
2. Industry classification: 44 manufacturing companies, and 28 service industry companies.
3. Company size (number of employees, statistics at the time of system introduction, total number of employees as one united company for group companies):
3-100 employees: 5 companies
101-500 employees: 23 companies
501-1000 employees: 33 companies
1001-5000 employees: 6 companies
5001-10000 employees: 1 company
Unknown: 4 companies
Japan’s permanent (regular) employment system, or long-term employment system is basically a trade-off system that permanent employees accept long working hours, work shifts, transfer or career changes (can go anywhere, do anything) in exchange for enjoying employment stability. From there, the problem of overwork of permanent employees has arisen.
According to OECD’s EPL index, it is considered as a country with strong employment regulations by exceeding the OECD average. However, compared to the EU countries that make up the majority of OECD member countries, Japan does not have particularly strong restrictions on dismissal. For example, France and Italy are more restrictive than Japan. The most problematic issue in OECD assessments and recommendations for Japan is the disparity of permanent employment and non-permanent employment. Therefore, Japan was urged by OECD to loosen or deregulate strict permanent employment protection, and to strengthen non-permanent employment protection.
As the most important measure of the labor market, “the principle of equal treatment” means that no employee should be discriminated against in employment opportunities, job training, promotion or working conditions. It must be treated equally.
The “Three-layered System” provides a platform that can be shared between permanent and non- permanent employees. The multi-layered structure sets the second level with replaceable options and offers various choices. For example, an option that allows young employees to reset their career plans including early retirement, or options for limited work place without transfer, particular job content, but no guarantee of lifetime employment.
“Work style reform” begins on the concept of Japanese corporate culture, Japanese lifestyle, and Japanese value itself. We pursue a society that allows choosing diverse and flexible way of working according to the intention and ability of each employee and the individual circumstances placed. By doing this, we aim to realize people’s work-life balance and improvement of productivity, with the achievement of coordinating or restructuring the corporate culture adapted to the era.
It is not possible for companies to realize high productivity, without creating high autonomy and happiness by giving each employee the freedom of choice. In a word, “Work style reform” is also a kind of reform to realize a 100 million total active society, which is a policy goal of the Abe cabinet of Japan. If it is, “Work style reform” inside every individual company should also be possible to be replaced as “reform to realize all employees total active companies” that is the dynamic engagement of all employees.
In the case of Japan, there is no room to maintain the conventional lifetime employment system, and movements trying to bury lifetime employment as an obsolete affair are emerging. However, the way of “all or nothing” like this, gives radical shock to society. Consideration on alternative options is more rational. While an employment system that puts value on full performance-based is existing, a traditional lifetime employment method should be also workable to the employees who desire to join in, if it fulfills some assumptions.
Just like the principle of “one country, two system” was first proposed by Deng Xiaoping in the early 1980s as way to reconcile the communist mainland with historically Chinese territories of Hong Kong that had capitalist economies, it is also a strategy to respond to diversification by the functions of so-called “one company, two systems” or even “one company, multi systems” at this time. “Three-layered System” is exactly the idea and basis of a multi-model with such high rationality.
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