“We Can’t Hire at Our Internal Salary Levels”
As competition for talent intensifies, hiring managers are increasingly facing this challenge.
For example, an existing employee may earn JPY 12 million per year. However, hiring someone mid-career with comparable skills may require an offer of JPY 15 million.
This creates “salary inversion.”
The issue is becoming especially noticeable in high-demand specialist fields such as IT engineering, digital transformation (DX), and data science. Japanese companies have traditionally operated compensation systems that place significant weight on factors such as age, tenure, and job grade.
As a result, companies may think:
“If employees in the same role earn JPY 12 million, we cannot offer more than JPY 12 million to a new hire.”
However, maintaining this standard can mean losing candidates to competitors offering JPY 15 million.
On the other hand, offering JPY 15 million to a new hire can create a significant salary gap with existing employees who have contributed to the company for many years.
Companies are therefore facing the difficult challenge of balancing market-competitive compensation with internal pay equity.
Salary Inversion Is Not Just About Money
The Sense of “Unfairness” Created by Salary Inversion
When mid-career hires receive higher salaries, the problem for existing employees is not simply the difference in compensation. Employees may begin asking:
“Is the experience I’ve built here not being valued?”
“Why is someone coming from outside valued more highly than I am?”
These doubts can emerge quickly. If salary inversion occurs without a clear explanation, it can create not only a sense of unfairness but also undermine employees’ trust in the company.
One useful framework for understanding this situation is Equity Theory, a concept studied in psychology and organizational behavior. People often compare the balance between what they contribute to their work—such as experience, effort, and results—and the rewards they receive with those of the people around them.
When employees feel:
“I have more experience and responsibility, yet I’m paid less.”
They may perceive the situation as unfair. This sense of unfairness can affect more than satisfaction with compensation. It may also reduce trust in the company and increase employees’ intention to leave. Particular attention should be paid to mid-career and veteran employees who support day-to-day operations.
These employees often possess valuable institutional knowledge and skills that are also highly transferable in the external job market. They may begin thinking:
“Maybe I’ll be valued more highly if I change companies.”
As more employees reach this conclusion, salary inversion can develop from a hiring problem into a retention problem. The key is not simply eliminating salary differences, but ensuring employees understand why those differences exist.
One Resignation Can Trigger a “Turnover Domino Effect”
The risk associated with salary dissatisfaction does not necessarily end when one employee leaves. When a mid-career or veteran employee resigns, their responsibilities, client relationships, and mentoring duties often fall to the employees who remain.
They may begin thinking:
“My workload has increased.”
“The handover wasn’t sufficient.”
“Why am I the one who has to carry the extra burden?”
Employees who already had doubts about their compensation or evaluation may then begin considering a job change themselves. If a highly regarded employee resigns, another type of information may also spread internally:
“Even someone who performed that well decided to leave.”
“Apparently, they received a higher salary by changing jobs.”
This can prompt remaining employees to reassess their own market value and start looking at opportunities elsewhere. In this way, one resignation can lead to another—the “turnover domino effect.”
In workplaces where existing employees feel that “only mid-career hires are being given preferential treatment,” cooperation and knowledge sharing with new employees may also deteriorate. If a highly paid new hire then leaves shortly after joining, the company risks losing both its existing employees and its new talent.
The true cost of salary inversion is not simply the JPY 2 million salary difference.
How Should Companies Respond?
For many companies, immediately raising every employee’s salary to market rates is unrealistic. The question, therefore, is not simply whether to “pay JPY 15 million or keep salaries at JPY 12 million.” Companies need to combine multiple approaches.
1. Use Sign-On Bonuses to Adjust Compensation at the Time of Hire
One option is to provide a sign-on bonus, a one-time payment made when an employee joins. For example, the employee’s base salary can remain aligned with the company’s internal salary structure while a one-time payment helps bridge part of the gap between internal compensation and the candidate’s market expectations.
Compared with permanently increasing base salary, this approach can reduce the impact on the company’s internal salary balance. However, companies should be cautious when establishing repayment conditions for employees who leave within a short period, as these arrangements may raise labor-law considerations.
Sign-on bonuses cannot simply be designed without restriction. Careful structuring, including legal review, is necessary.
2. Consider Job-Based or Specialist Salary Ranges
Another approach is to determine compensation based on the market value of a particular role or profession. When every position is managed under the same salary structure, companies may struggle to recruit specialists whose market value is particularly high. Companies can therefore introduce job-based compensation principles or establish separate salary ranges for highly specialized positions.
The important point is to explain that:
“The salary is not higher simply because this is a mid-career hire. It is higher because the market value of this particular job or role is higher.”
3. Review the Evaluation and Future Compensation of Existing Employees
Addressing external hires alone is not enough. For existing employees whose compensation has fallen significantly behind market levels, companies should also consider reviewing promotions, role classifications, and compensation. Employees need clarity around questions such as:
“What will I be evaluated on in order to increase my salary?”
“What kind of career path can I expect here?”
Providing greater transparency around these issues can improve employees’ sense of fairness and acceptance.
Summary
- Market salary levels are rising, making situations such as “JPY 12 million internally vs. JPY 15 million in the external market” increasingly common.
- Ignoring salary inversion can create a sense of unfairness among existing employees, undermine trust in the company, and potentially lead to the departure of key employees and a “turnover domino effect.”
- Companies should consider ways to balance internal compensation structures with market rates, including sign-on bonuses and job-based or specialist salary ranges.
- It is important to think about recruitment and retention together, including the evaluation, promotion opportunities, career paths, and compensation of existing employees—not only the salaries offered to external hires.