As Inflation Rises, Toyota CEO Supports Merit-Based Pay

There will be increased flexibility and merit-based approaches to the promotion and rewards of Toyota employees based on the resumption of inflation in Japan, which is triggering a wider reckoning on the long-stagnant pay scales imposed on the company.

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The incoming Chief Executive Officer of Toyota, Koji Sato, said at a briefing Wednesday that the company must be more innovative with its workers, not just efficient, in order to become a mobility company that provides a wide range of products and services to transport people and goods as a whole instead of just manufacturing cars. 

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As yet another Japanese corporation joins a growing cabal urging the government to take a more active role in promoting merit-based pay, Toyota has joined them. There have been significant changes around salaries in Japan in recent years, with the central bank urging companies to increase their wages to compensate for the return of inflation and to cope with a historical shift around salaries more generally. As of next month, Toyota's largest carmaker is going to have a new leader Sato, the former CEO of the company's Lexus brand.

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"We value wages as an investment in people," Sato said Wednesday. "Considering inflation and the changing labor market, we also understand people need to have easy access to food and shelter."

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In the context of annual wage negotiations, Toyota is seen as an important bellwether company, as it is the country's largest employer. Despite the high level of pay increases recently experienced by Japanese companies in response to rising prices, these increases have not been high enough to cause the Bank of Japan to end its ultra-loose monetary policy at any time in the near future. According to the Central Bank, to ensure that the trend in prices is sustainable, it is essential to see stronger growth in wages. 

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It was noted that Sato declined to comment on whether other companies had made a similar decision, but added, "I get the impression that there was a lot of positive discussion during the wage discussions." Regarding those broader discussions, Sato declined to comment.

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One of the largest Japanese companies, Nintendo Co., said in February that it would increase salaries for full-time employees of the Uniqlo clothing brand by 10%, while Fast Retailing Co., the owner of the Uniqlo clothing brand, announced that it would increase salaries by 40% for full-time employees. 

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As part of the first round of negotiations held by Toyota this year, the company said it had met the union's demands completely for the third consecutive year, having agreed to increase salaries, including base wages, as well as offer bonuses equal to the equivalent of 6.7 months of salary during this year's negotiations.

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According to estimates, broad wage hikes are expected to occur across the Japanese corporate sector between 2.6% and 2.8%, well below what the collective bargaining group Rengo wants for a 5% wage increase, as well as the 3% threshold that the central bank seeks to meet in order to shift policy direction and achieve its inflation goal. 

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Toyota will be doing away with employee evaluations based on education and seniority in the near future and instead place a greater emphasis on evaluating employees based on their personal contributions to the business, as well as societal and industry contributions.