Smaller Japanese companies struggling to keep up with demands for more money from employees who are themselves struggling to make ends meet, might have a way to pay more without paying too much.
By using various types of non-salary compensation, they can give shadow raises while avoiding some of the costs that normally accompany simple salary increases.
“An increasing number of companies come to us with a clear objective: that they want to use employee benefits to increase disposable income as an alternative to direct pay hikes,” said Shigeru Aizawa, head of employee benefits in the empowerment division at Tokyo-based Freee.
The practice of padding compensation in creative low-cost ways has become known as the “third wage hike.”
In 2024, Freee, which offers services to support back-office operations for small businesses, and Edenred Japan, a provider of meal ticket services for employee benefits, teamed up and introduced the “third wage hike action” project.
At that time, wage growth was starting to pick up in Japan after decades of stagnation.
In the 2024 spring wage offensive, unions representing mostly employees of larger companies won 5% wage increases, a 30-year high. The average wage increase was even higher in 2025, and this year, the momentum is holding.
For small companies, these increases can be a challenge. They don’t have the funding to cover higher wages, but are pressured to match the trend to attract and hold employees.
The minimum wage has been rising as well, with the average in the country up 6.3% last year to ¥1,121 an hour.
“Looking at the recent business environment, a lot of smaller businesses have been pushed into a state where they are feeling exhausted by the constant pressure to raise wages,” Aizawa said.
This is where beefing up employee benefits could help, he noted.
Direct wage increases result in disproportionately higher costs for companies and employees.
Pay increases can lead to higher income tax and social insurance premiums, meaning employees may see a disappointing boost in take-home pay despite higher wages. The social insurance math can become particularly bad as the headline salary rises.
Employee benefits are a form of compensation that don’t fully feed into this calculation, so more can be given to the employee without triggering a tax penalty.
A company can lease an apartment and provide it as corporate housing, allowing employees to live there at a discounted rate through a salary deduction. A direct housing allowance added to a paycheck would be taxable, but the employer-provided model avoids the tax jump for both the employee and the company.
Edenred Japan provides a digital meal ticket service for employee benefits. It reduces out-of-pocket costs for workers by half at registered restaurants and convenience stores….