Unraveling the stagnation of employee pay in Japanese firms: the impact of profit creation, employee productivity, and employee share

This study investigated the causes of stagnant employee pay in Japanese firms. By analyzing agency theory and Japanese governance structure, we argue that pay levels are affected by profit creation, employee productivity, and employee share. Dysfunctional processes in these areas can result in pay stagnation. Our findings demonstrate that employee productivity and profit creation have equally significant impacts on pay levels, whereas employee share affects pay only with high employee productivity. These results suggest that the main reason for stagnant employee pay in Japan is not a failure of profit sharing but rather a failure to link corporate and employee capabilities to a firm’s earning power.