Question

2. Japanese CEOs generally receive much lower levels of compensation than CEOs in the United States. Does this imply that U.S. CEOs are overpaid?

Answer 1

In March 2010, the Japanese regulator, the Financial Services Agency, implemented the

country’s first legislation concerning the disclosure of compensation for individually named

directors.. Beginning in 2010, publicly traded companies in Japan are required to disclose the

amount of compensation paid to each of their directors if the remuneration for the relevant fiscal

year is 100 million yen or more.

Japan’s important role as a major economic power, however, studies of Japanese firms have been limited.

Without direct access to compensation data for executives, researchers have tended to investigate these firms using a

more circuitous approach by examining either the average compensation amount paid to all of a firm’s directors

Since top executives in Japan are typically directors and receive the highest compensation, most of these

companies have disclosed the compensation amounts for the chief executive officer (CEO).

Given the disclosure threshold of 100 million yen, our sample is confined to the highest paid top

executives and is hence relatively small compared to the entire sample of all listed Japanese companies.The first is strong

dominance of salary: Japanese CEOs’ base salaries account for more than two-thirds of their total remuneration.

Such salary dominance is observed across all industries and from all size groups. Another feature is that CEO pay is

economically insensitive to the two important variables of firm size and performance, thus to a

large extent exhibits pay uniformity across firms. These features suggest a unique compensation

system that contrasts with that typically employed in U.S. companies. While these features are in line with the general

perception that Japanese managers earn less than their U.S. counterparts, our findings provide the first direct evidence

on the level and structure of CEO compensation in Japan and allow us to quantify the differences between Japan and the U.S.

The newly disclosed Japanese data allow us to compare all major components

of compensation and to control for firm characteristics as well as CEO attributes. By matching

each Japanese company in our sample with a U.S. company from the same industry and of a

similar size, we obtain 274 pairs of one-for-one matched Japanese and U.S. firms .

On average, Japanese CEOs’ base salaries account for 71% of their total compensation, while annual bonuses

and grants of stock options, which are the major components of incentive pay in Japan,2 together

account for merely 23% of the total. On the contrary, U.S. CEOs’ base salaries on average account for just 21% of their total compensation,

while incentive pay consisting of bonuses, stock option awards, and restricted stock represents more than 73%. We then verify that CEO pay in Japan is relatively insensitive to firm size and performance.

Our study presents a case of great international differences in executive compensation.

Given the scale and importance of the Japanese economy, the large differences between Japan

and the U.S. seem surprising and are difficult to explain based on standard contractual terms or

conventional economic mechanisms.

The new regulation took effect in March 2010, under which publicly listed

companies were required to disclose, beginning in 2010, the compensation provided to each of

their directors so long as a director’s total remuneration is 100 million yen or more.

Our sample is based on the Standard and Poor’s Compustat Global database of listed

Japanese companies. For each year from 2010 to 2015,5 we check the corporate governance

section of all companies’ securities reports for the information on director compensation.

*Japanese Executive Compensation :

=> Level and Structure of CEO Pay:

1. In 2015 Japanese yen, the average salary, bonus, stock option grants, and pension benefits are 124

million, 33 million, 12 million, and 7 million, respectively. These four major components

account for 71%, 18%, 6%, and 4%, respectively, of a CEO’s total compensation.

2. In a recent study providing international comparisons, Fernandes et al. (2013) examine

1,648 U.S. firms and 1,615 non-U.S. firms from 13 countries not including Japan, using CEO

compensation data around the 2006 fiscal year.

3.The authors find that salary, bonuses, and stock

awards (including option grants) account for 28%, 27%, and 39%, respectively, of a CEO’s pay

in the U.S., and 46%, 24%, and 22% of a CEO’s pay in the other. In

contrast to this finding, our data for Japanese executives suggest large differences in the

compensation structure between Japan and those countries.

* A Comparison between Japan and the United States:

There are good reasons to perform a close comparison of executive compensation

between Japan and the U.S. While both countries are major players in the global economy, they

have sharply contrasting cultural and institutional backgrounds and organizational structures

With the first publicly available data on Japanese executives, however, we are able to perform a close, direct comparison between the two

countries, thus providing direct evidence of Japan–U.S. differences in compensation systems and

shedding new light on some of these issues.

For each Japanese firm in our sample, we identify a matching U.S. firm from the Standard & Poor’s ExecuComp database based on the following

criterion: The matching firm must be in the same industry sector based on the Fama–French 30 industry

classification, and it must have total assets of between 50% and 150% of its Japanese

counterpart.

Japanese CEO pay is relatively invariant to sales levels, and, consequently, the Japan–U.S. difference increases strongly with company size

At sales of $3 billion and stock return volatility of 30% (which are close to the sample medians), Japanese

CEOs receive $1.02 million while U.S. CEOs receive $4.87 million, or 377% higher.

Regarding the pay level (which concerns the research question of how much managers are paid), we estimate the total

compensation of a U.S. CEO of an average-sized firm at $4.8 million, but find the total

compensation to be only $1.1 million for the Japanese counterpart after controlling for firm characteristics and CEO attributes.

*Conclusion :

Using the first publicly available data on compensation provided to individually named

Japanese directors, we conduct a direct comprehensive study of the level, structure, and

mechanisms of CEO compensation in Japan.

Japanese CEOs are paid a dominant base salary that, on average, accounts for two-thirds

of their total compensation. Although pay generally increases with firm size and performance,

the pay–size and pay–performance relationships are economically weak.

Despite an international influence from foreign institutional investors and the cross-listing of

Japanese firms on U.S. stock exchanges, the executive compensation system in Japan has

maintained its distinct features and remains substantially different from the U.S. system, even at

the present time.