Japanese Banks Check Out a New Rewards System

As Japan resumed its attempt this week to repair a crippled banking system--a task on which the recovery of Asia arguably depends--there may be no clearer example of the obstacles it faces than the cultural resistance to simply rewarding bank employees for doing a good job.

This is hardly a revolutionary concept for most Americans. Yet in Japan’s deeply troubled and relatively insulated financial industry--which has been nurtured for decades on a diet of heavy regulation, group performance and corporate harmony--it’s been something of a rude awakening.

Toshi Hori, an employee at one of Japan’s 19 largest banks, is among the thousands of Japanese bank workers bracing for just such change. He, for one, believes that the change is overdue.

“It’s natural for those who perform better to earn more money,” said the employee, dressed in a green suit and blue tie printed with interlocking monkeys. “We can’t survive under the current system.”

But Hori seems to be the exception. An anonymous 32-year-old bank worker complains that the whole notion is “damaging to morale.” It is uncaring and undermines loyalty to the company, he said. “It’s like you’re climbing a ladder and, all of a sudden, they pull it out from under you.”

Japan’s financial industry, limping toward the 21st century under the weight of too many banks, too much bad debt and too few global standards, is at the heart of the nation’s--and thus Asia’s--economic crisis.

The international community is demanding that Japan fix the system, notably a staggering burden of potentially worthless loans totaling as much as $1 trillion.

Traditional Practices Under Scrutiny

However, dispensing with that debt--a key topic at this week’s U.S. summit between Prime Minister Keizo Obuchi and President Clinton--is only part of the answer. The banks of the world’s second-largest economy must reinvent themselves so that their failures do not recur.

Under particular scrutiny are traditional personnel practices that have tended to downplay accountability and favored the hiring of generalists instead of the skilled experts needed in today’s competitive global environment.

Yet compared with the often brutal pace of U.S. restructuring--a pace that some economists say is painful but produces faster results--Japanese banks sometimes seem to be fiddling while their assets burn.

To be sure, it demands a huge attitude adjustment.

A decade ago, Japanese bankers inspired Godzilla-like fear as they stalked the globe in search of prime investments and trophy real estate holdings. Now they stand humbled before an angry Japanese public, pressured to return past bonuses as their treasured anonymity falls victim to televised debates over their bubble-era excesses.

Moreover, Japanese bankers and others say Japan starts from a very different baseline in trying to boost productivity, which affects its approach.

“The Japanese company system is more family-like,” said Katsumi Tsuiji, a personnel executive with Tokyo-Mitsubishi Bank. “Employees who do something wrong are not likely to get fired. And it’s rare to [be promoted ahead of] your seniors.”

Furthermore, although the United States has been a global leader in the use of stock ownership plans and other innovative compensation programs, their application may be somewhat limited in Japan, several executives said. Labor practices are part and parcel of the culture they spring from and can’t generally be exported without some adaptation.

U.S., Japanese Worker Mentalities Differ

Unlike Japan, the long tradition in the U.S. of independence, job-hopping, geographical mobility and rapid social change has given Americans experience and tools to manage transitions.

“The mentality of the workers are very different between Japanese and U.S. companies,” said Junichi Nishizawa, deputy general manager of personnel at Fuji Bank.

Japanese banking executives add that periods such as the present--marked by upheaval, rapid technological shifts and sharp economic change--tend to favor rapid-fire, U.S.-style decision-making. Times of economic stability, on the other hand, tend to reward a cohesive, Japanese-style work force.

“Right now, the Anglo-Saxon system is doing quite well, and people say the Japanese era is over,” Nishizawa said. “But I think that’s not true. The Japanese system still has some good qualities.”

Another problem is that changes that appear painfully slow on the surface can sometimes mask far more fundamental shifts underneath, adds Scott Woodford, Tokyo-based managing director of Executive Search International.

While conservative industries such as banking appear to take forever to put a few simple pay and merit systems in place, at deeper levels Japan is struggling to strengthen state unemployment, welfare and pension systems before it completely jettisons lifetime employment and traditional corporate benevolence.

“There’s no precedent for large-scale unemployment or restructuring,” Woodford said, which leaves some very large holes in the social safety net. “Five years ago they had no safety net. It’s pretty scary.”

And shifts in the way people are rewarded are delicate in any country.

“For some people from outside, [the change] seems too slow,” said Haruo Shimada, economics professor at Keio University. “For Japanese people, it seems too fast. Labor issues can’t move so quickly in any country, including the United States.”

Introducing Changes With Kid Gloves

Given the sensitivities, bank personnel executives say they have been careful to introduce the changes with kid gloves, in many cases only after two years of laborious study and numerous meetings with staff and union representatives.

“People have been quite suspicious,” said Fuji’s Nishizawa, mirroring others’ comments. “They understand it all logically, but you still aren’t sure how they really feel.”

Still, by Western standards, most of the new incentive programs remain quite modest. Programs unveiled since April by Daiwa Bank, Fuji, Sakura Bank, Sumitomo Bank, Tokyo-Mitsubishi and others tend to apply to only a few specialized departments, such as trading, derivatives and fund management. Daiwa, for instance, limits its new specialist pay system to pension funds, investment trusts, currency trading and computer engineers.

In most cases, the number of people affected is also small. Only 200 of Sumitomo’s 10,000 employees are eligible for its financial specialist system, while at Daiwa 33 of 8,100 employees have applied, and no one has yet signed up at Tokyo-Mitsubishi.

Implementation also seems quite gentle. At most of the Japanese banks, employees decide for themselves whether to become part of these new systems, and less dramatic changes are phased in over extended periods.

“On the implementation side, we’ll need a few more years to see how it works out,” Nishizawa said.

For the relatively few who sign on to the new systems, however, the rewards can be substantial. At Sumitomo, for instance, qualified foreign-exchange specialists can earn up to four times their current salaries.

Some Stand to Lose Under New System

There’s been a certain logic in underpaying younger employees and then overpaying them as they become older and more saddled with obligations, said a Sakura Bank employee who requested anonymity. Now the new incentive-based systems threaten to disproportionately benefit only a few.

“I’m not worried for myself. I don’t have children, and my wife works,” said the employee, wearing black-rimmed glasses and dark, slicked-back hair, his tall frame wrapped in a gray pinstripe suit. “But my boss has loans, children. If he gets less in salary, his life will be very tough.”

Banks concede that the new system will inevitably create winners and losers but add that the industry must make the changes to survive.

Furthermore, although Japanese banks may seem to outsiders to be moving slowly, personnel managers say this is only the first--and perhaps hardest--step.

“We are now thinking about a total change in our compensation system, not just for these 200 people but for all the others, the 10,000,” said Yasuyuki Kawasaki, assistant general manager of personnel with Sumitomo.

Before that happens, however, Japan must come to terms with one of its biggest problems--how to handle the ranks of loyal generalists who have devoted their lives to banks and large companies.

“It’s a difficult question,” Kawasaki said. These people deserve special consideration, “but balance is the key. We can’t afford to be so generous as we are now.”

Finding that balance sooner rather than later will be essential for Japanese banks intent on making a comeback in the face of often severe market pressure.

“They’ve got to rationalize,” said Thomas J. Nevins, president of TMT Inc., a Tokyo-based placement company. “When the ratings from Moody’s go down, someone’s got to pay.”