“An existing employee earns JPY 10 million a year. Yet hiring someone from outside with the same skills requires JPY 12 million.”
This type of salary inversion between existing employees and mid-career hires is becoming a serious issue for many companies as the recruitment market continues to change.
One possible solution is to base compensation on the “role” rather than the “individual”—in other words, to introduce a job-based HR system.
What Does It Mean to Pay the “Role” Rather Than the “Person”?
Traditionally, many Japanese companies have used a membership-based employment system, under which compensation is determined by factors such as length of service, individual capabilities, and an internal grading system.
Under a job-based system, companies clearly define:
- What responsibilities the position carries
- How much decision-making authority it has
- What outcomes it is expected to deliver
Compensation is then determined according to the value of the role itself.
For example, if the market value of a position responsible for driving digital transformation is JPY 12 million, the company sets the compensation range for that role accordingly. This same JPY 12 million-level compensation range applies not only to external hires but also to existing employees assigned to the position.
This makes it possible to explain that the salary is high because the role itself has significant value — not simply because someone was hired from outside. A major advantage is that the sense of unfairness often created by salary inversion — “Why does that person earn more than I do?” — can be reframed as an understandable difference based on the value of each role.
A Separate Pay Scale for Highly Specialized Roles Is Another Option
Manufacturers, financial institutions, trading companies, and other organizations do not necessarily need to transition entirely to a job-based system. Another option is to retain the existing system for generalist positions while introducing a separate compensation range for highly specialized roles.
For example, a company could maintain a salary range of approximately JPY 10 million for generalist roles while allowing specialist positions to offer JPY 12 million or more, in line with market rates.
Another possible approach is to establish a separate subsidiary for IT professionals and apply a distinct evaluation and compensation system there.
The important point is not to insist on a single, company-wide system.
Simply revising the evaluation framework for roles that are most disconnected from market rates may be enough to improve the company’s ability to attract talent.
Instead of creating exceptions to hire expensive talent, create a system that pays appropriately for high-value work.
Existing Employees Need to See How Their Own Pay Can Increase
When changing the compensation system, companies must not overlook the concerns of their existing employees. According to a studies, only 27% of continuously employed workers aged 49 or younger believe that their salary will change over the next three years. Furthermore, if their salary does not increase, 38% of employees in their twenties — and 26% overall — say they would consider changing jobs.*
What matters, therefore, is not only a “horizontal comparison” with employees at other companies, but also a “vertical comparison” that shows how an employee’s own compensation can grow in the future. For example, employees should be able to see a clear progression such as:
“Your current role pays JPY 9 million.”
“If you take on this role, your compensation will increase to JPY 10 million.”
“If you develop this area of expertise, your compensation can rise to JPY 12 million.”
When employees can see this path, they are more likely to view internal development as a viable choice and to feel optimistic about their future with the company. The value of a job-based system is not limited to enabling companies to offer higher salaries to highly skilled professionals. It also allows them to explain why a particular salary level has been set and where employees should aim next.
Summary
- A job-based system determines compensation based on the value of the job or role, rather than the individual.
- When salary inversion occurs, companies can explain that the compensation is higher because the role has greater value—not simply because the employee was hired mid-career.
- Companies do not need to introduce a job-based system across the entire organization. They can begin by establishing a separate compensation scale for highly specialized roles.
- It is important to show existing employees a “vertical comparison”—how their compensation can increase when they move into a different role.
As the recruitment market changes, compensation systems do not necessarily need to remain in their traditional form.
The question should not be, “How much should we pay this person?” but rather:
“What value should we assign to this role and the work it involves?”
This perspective may offer companies a valuable clue for improving both talent acquisition and employee retention.