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Toyota Motor Corp.’s union is planning to propose that a larger emphasis is put on performance when determining workers’ pay increases, rather than continuing the current system in which seniority is the main criteria, a source close to the matter said Thursday.

The Toyota union’s policy is widely used as a standard-setter for annual wage negotiations across Japan each spring. The proposed system, reflecting management’s wishes, would increase the possibility that larger wage gaps could form between union members at Toyota.

The policy change comes as Japan’s largest automaker faces a difficult market environment, with the industry rapidly shifting to electrified and autonomous vehicles, leaving the company looking to improve its competitiveness.

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Some union members have called for the introduction of a system in which wages are decided on the basis of performance, the source said.

The Japan Business Federation, the country’s biggest lobby group known as Keidanren, has also called for a wide-scale review to Japanese-style employment and wage systems to attract talent.

Traditionally, Japanese workers receive automatic wage increases on the basis of their age or length of service.

“As the industrial structure changes, companies need to adopt a system that pushes employees to take on new challenges,” Keidanren’s Chairman Hiroaki Nakanishi told a recent press conference. “Systems at some Japanese companies are no longer matching the modern era.”

The Toyota Motor Workers’ Union is considering proposing that wage increases be more focused on a five-grade evaluation system, with an employee graded higher receiving more than a co-worker who is evaluated less favourably, the source said.

It also plans to urge the company to train managers to ensure they can deliver fair assessments of employees, the source said.

In the previous wage negotiations, Toyota’s management said, “Going forward, we need to seriously consider whether there is a need to raise wages uniformly.”

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“It may be better to allocate larger pay raises first to those who worked hard but who were not paid enough,” it said.

The union will present its plan to members in late January and make a decision the following month, the source said.

Some major Japanese companies have decided to change their wage system from one based on seniority to one reflecting worker ability and performance.

From July 2021, Mizuho Financial Group Inc. is set to abolish automatic wage hikes for some 5,000 managers at its group firms including Mizuho Bank Ltd. and Mizuho Trust & Banking Co. as a step to enhance the motivation of younger employees, a source close to the matter said earlier.

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