Human Resources Becoming Bad Debts

September 5, 2022
by Noriyuki Morimoto

When a company decides how to treat its human resources, compensation can only be determined in advance, and performance can only be known afterwards. Given this, compensation can only be determined based on expectations of actual performance and contribution. Even if the decision is based on past performance, it is still a reward for expectation, because it is based on the expectation that past performance will be replicated.

Therefore, a gap inevitably forms between prior expectations and actual performance. This gap must be reconciled, albeit with the difficult question of which timeline to choose for the adjustment. Whether performance exceeds or falls short of expectations, either way, adjustments must be made. Otherwise, the fairness and impartiality of the human resources system cannot be maintained, which could ultimately lead to a breakdown of organizational control. Herein lies the crux of the human resources system.

When performance exceeds expectations, it is not so difficult, as it can be managed by bonuses and other benefits. The problem arises when performance falls short of expectations, i.e., when, figuratively speaking, human resources become bad debts.

An easy way to avoid such bad debt is commission-based payment. With commissions, the upfront reward based on expectations is trimmed to a minimum, and total pay is adjusted afterwards based on performance during that period, so there is no risk of missing expectations. Commission-based pay is actually widely used in many fields, including life insurance sales.

However, commission pay works only when it is based on actions and performance under complete individual responsibility, and performance can be objectively quantified through results such as sales amounts. When considering collaboration within an organization, the growth of talent through such collaboration, and the mechanism to evaluate contribution within the organization, there are limits to its general application. Therefore, it is inevitable that human resources become bad debts.

Now, how should the bad debts of human resources be written off?


[Category /Human Capital Investment]

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.