Personnel costs in Japan: IT Industry Rates

August 28, 2024

Personnel costs vary significantly depending on the market, the industry and the organization, and successful business management requires a good understanding of these costs at both an institutional and individual level.

This article firstly provides an overview of personnel costs, what they are and what ratio they should be of an organization’s revenues. Then, we will look at market rates in Japan for individual IT roles and explain why Japan is a great place to shift your IT business to.

Personnel costs refer to the salaries, allowances, and other expenses paid to the employees of a company. They also include all the taxes and social welfare payments made on behalf of the employees as well as the administrative costs involved in employing people.

Personnel costs can, therefore, be divided into two types: direct costs which are paid directly to employees and indirect costs which are not. Direct costs include wages, overtime pay, bonuses, and allowances. Indirect costs, on the other hand, comprise of pension payments, welfare contributions, the use of company equipment (computers, smartphones, etc.) and facilities, and recruitment and administrative costs*.

*It is worth noting that, depending on the purpose of the analysis, equipment, facilities and administrative costs are excluded from many personnel cost calculations. We are not including them in calculations and references to personnel costs in the remainder of this article.

The labor cost ratio is an indicator that shows personnel costs as a percentage of sales revenue.

The calculation method is as follows:
Labor Cost Ratio= (Personnel Costs ÷ Revenue) × 100

A high labor cost ratio will place an unwanted burden on an organization, while a very low ratio can indicate a heavy burden on staff and can result in labor problems. The optimal labor cost ratio is around 13%, but it varies greatly depending on the industry and company size.

The gross profit to labor cost ratio also varies but typically should be under 50%.

Labor Cost Ratio Benchmarks

Let’s look at labor cost ratios across different industries:

Source: Basic Survey of Japanese Business Structure and Activities 2021, Ministry of Economy, Trade and Industry.

Having looked at personnel costs from the perspective of a whole organization, let’s look at them in terms of individuals. Below is the basic breakdown of what an organization pays for each employee:

3-1. Salary and Allowances

These include the fixed salary, overtime pay, holiday allowances, bonuses, and commuting allowances. Other outgoings that belong to this category include support for employee or family weddings and funerals, company housing costs, expenses for company events and employee trips, as well as meal-related expenses like company cafeterias or meal allowances. These welfare expenses play a vital role in enhancing employee satisfaction and motivation.

3-2. Statutory Welfare Costs

Statutory welfare costs refer to social insurance and labor insurance premiums that companies are legally required to pay for their employees. The main statutory welfare costs are for health insurance, state pension contributions, nursing care insurance, workers’ compensation insurance and unemployment insurance.

Health insurance covers any general medical expenses in case of illness or injury. Retirement pensions and nursing care insurance support employees post-retirement. Workers’ compensation insurance compensates employees for loss of income due to injuries or illnesses incurred as a result of work, while unemployment insurance supports staff if they suddenly find themselves out of a job.

3-3. Retirement Benefits

Retirement benefits are payments made to employees upon retirement. They can be divided into two types: lump-sum payments and retirement pensions.

• Lump-Sum Retirement Allowances: These are one-time payments made at the time of retirement and the amount depends on the number of years they have been at the company.
• Retirement Pensions: These are regular payments made from the corporate pension system to employees after retirement.

Finally, let’s look at the costs at an individual level by examining different IT roles and the expected personnel expenses involved (¥ 147=$1):

• Project Manager – responsible for managing an entire project and ensuring its success by overseeing schedules, budgets, and engaging in team management. The personnel costs for Project Managers range from ¥700,000 – ¥1,320,000 per month (approximately $4,900 – $9,240 USD)
• IT Analyst – responsible for analyzing and evaluating both existing information systems and new systems during planning and implementation stages. The personnel costs for IT Analysts are from ¥800,000 – ¥1,170,000 per month (approximately $5,600 – $8,190 USD)
• IT Architect – responsible for planning and designing systems for a company’s ongoing business activities. They design systems that meet an organization’s requirements, and are also designing a system’s operational and maintenance processes. The personnel costs for IT Architects range from ¥780,000 – ¥1,270,000 per month (approximately $5,460 – $8,890 USD)
• System Operations – involves managing systems to ensure they function properly. This includes post-deployment tasks such as troubleshooting, applying updates, and patches. The personnel costs for System Operations are from ¥480,000 – ¥990,000 per month (approximately $3,360 – $6,930 USD)
• Software Development – involves designing and developing software and then testing to ensure it functions correctly. The personnel costs for Software Development range from ¥460,000 – ¥720,000 per month (approximately $3,220 – $5,040 USD)

What is not apparent from these figures is how they stand up to personnel costs in other countries.

Thanks to changes in Japan’s economic situation, individual IT personnel costs can be up to 30% lower than in other developed markets.

For example, according to Indeed, the current average personnel cost for a software developer in the US is ¥820,000 per month, $5,300, this compares to an average of ¥590,000 ($4,010) in Japan. For some markets the savings can be even greater.

One of ISF NET’s clients in Singapore recently saved 40% on personnel costs by using Japan based IT engineers who work remotely to set up and operate a new IT security system.

The quality and expertise of Japanese engineers is very high, so it’s not surprising that more and more companies are either looking at setting up operations here, or offshoring to a provider.

If you would like to learn more or are interested in using Japanese engineers in your business, contact ISF NET.

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