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How are bonuses calculated in Japan?

By on June 1, 2017

In Japan, most companies pay twice-a-year bonuses to its full time employees.  The summer bonus or Kaki Shoyo  is paid in June or July and Toki Shoyo or Winter bonus is paid in December.

Giving of bonuses to employees is discretionary.  While most companies do some don’t.  But if you work for one that does, here’s what you need to know.

How bonuses are calculated by companies is often misunderstood by most foreigners I know.

Let’s say, for example, John Smith gets a job offer from a Japanese company.  His annual salary offer is 10M yen with 2 months bonus.  John Smith understands the calculation as – ” ¥10,000,000 divided by 12 months + 2 months bonus.”   However, the company’s offer is in fact  “¥10,000,000 (salary and 2 bonuses included).

But on bonus day, John Smith receives less than what he was expecting.  What happened?

Blame the formula most Japanese companies use.  So I will attempt to explain how it is calculated.

Bonus = Base pay x COP × α

COP is your performance appraisal based on certain grading critera set by the company.  (Note:  Each company’s grading system is different.)

For example, a score can look like this  “S = 1.4,  A = 1.2,  B = 1.0,  C = 0.8,  D = 0.6” etc.

“α” stands for adjustment factor which varies depending on the size of funds allocated for bonuses by the company. This means, the better the company’s financial standing is, the higher value the company gives.  But when performance is poor, the value goes down too.

Bonuses are calculated based on a fixed period.  Summer bonus is generally based from appraisals covering the period October to March of the previous year. Winter bonus covers April to September of the current year.  This is why new recruits hired in April do not get paid a summer bonus.

In Japan, there is a standing rule concerning payment of bonuses to resigning employees and this is where it gets tricky. For example, you decide to leave the company at the end of March. You have worked during the calculation period (Oct – Mar) and you expect to receive a summer bonus upon quitting.  If the date you choose to quit is also the same date you are to receive your bonus, the company has the right to withhold payment and you can not do anything about it.  Like I said, bonuses are discretionary and companies make the rules so taking your grievance to the Labor Standards Office of Japan may end up being ignored.

There is also a clause in the rules of engagement that bonus payments may be cancelled at anytime without question. But usually, this happens only in cases where there’s a major crisis in the company you work for.

According to the Monthly Labor Survey conducted by Japan’s Ministry of Health, Labor and Welfare, 10% of business establishments did not pay summer bonus and 8% winter bonus (establishments with more than 30 employees) in 2016.

 

About Ted Tanaka