Using empirical data obtained from 450 firms in Tokyo and theoretical insights derived from the personnel economics and organizational behavior literature, we have found the following results. First, intrafirm wage differentials among employees are strongly associated with the disclosure policy of personnel evaluation results and promotion differentials, rather than individual marginal productivity. Second, promotion differentials, in turn, are correlated with firm's demographic composition of workforce, and the existing skill-grade (shokunoshikaku) system. Finally, changes in full HRM practices are more likely when the proportion of white-collar employees is high, and less likely when firms adopt the practice of transferring senior employees to subsidiaries (shukko). The evidence suggests that, to change their incentive mechanisms in face of the worst recession in the postwar period, the Japanese firms have widened wage differentials rather than promotion differentials, because the former is easier to implement, given the internal structure of the firm.
