Highlights from the 2024 analysis
As Japanese companies look to globalize their operations, there is increasing interest in the way non-executive, or outside, directors contribute to improvements in corporate value. And there’s a critical need to retain directors that can effectively support the growth of Japanese companies in both domestic as well as global markets.
An annual analysis on non-executive director pay (which complements similar research on CEO pay) found that there was a slight nudge upwards (2%) in the median outside director pay in Japan, compared with no change in the U.S. and higher changes of 10% or more in the U.K. and Germany. This research is based on publicly available data for over 500 companies in Japan, France, Germany, the U.K. and the U.S.
The key findings include:
The total outside director pay in Japan (cash and stock compensation) has increased from JPY 16.8 million to reach JPY 17.2 million in FY2023 (Figure 1). This represents a 2.3% year-over-year increase.
When comparing the cash compensation of outside directors that do not hold a leadership position (directors that are not a lead independent director or chair of the board), Japanese companies already have some degree of competitiveness with the U.S. and levels even exceed the French market.
A major gap between Japan and the Western markets remains for leadership positions, in that U.S. and European companies typically pay outside directors according to their responsibilities and seniority in addition to fees proportionate to the amount of time required to effectively serve the Board and its committees. While some companies in Japan pay additional fees for attendance to board or committee meetings, there is typically no significant differentiation in pay for leadership positions such as the chair of the Board, which depending on the market in the US and Europe, can attract compensation up to approximately 1.5 – 6 times higher than outside directors that don’t hold leadership positions (Figure 3). To attract global talent going forward, it will be essential to reconsider and design outside director pay structures to include Western benchmarks.
The prevalence of stock compensation being granted to outside directors in Japan remains unchanged with 10 companies (approx. 12%) disclosing equity grants to outside directors during FY2023 (Figure 2). The use of stock compensation remains relatively rare in Japan when compared to the U.K. and the U.S., where 29% and 99% of companies use equity plans for outside directors, respectively.
There are various benefits to granting equity to outside directors as part of pay, including greater alignment between the interests of shareholders and directors; increasing alignment to mid-to-long term growth; and it can also be an effective way to attract non-Japanese outside directors.
However, when considering the impact stock compensation may have on the supervisory function of outside directors and the strict guidelines for making grants of equity to outside directors that institutional investors and proxy advisors have as a part of their investment stewardship strategy[1], it will be essential that companies ensure grants of stock are free of performance hurdles.
Another important point to consider when revising outside director pay is to have appropriate governance structures in place. It is commonplace for companies in the U.S. and Europe to clearly define the roles and policies of the Board and its committees through the disclosure of Charters and to also make clear the responsibilities of the Board Chair, Committee Chair and Lead Independent Directors. Furthermore, details of the pay framework used for outside directors and the fees payable to each incumbent director are also disclosed as regular market practice. It is essential for Japanese companies to consider the accountability outside directors hold as they are expected to act as representatives of shareholders when revising their pay structures.
Outside director pay data was compiled by the WTW Global Executive Compensation Analysis team using public disclosures. Details of the analysis and basis of representation are as follows:
Source Note: Outside director analysis reflects individual pay for Outside Directors in the U.S. market and Non-Executive Directors in the U.K., German and French markets in addition to fee policies of each company under analysis. For outside directors that are not lead independent director or chair or the board, the average compensation for all applicable directors is used to calculate median (1 data point per company). Chair of the Board data represents the total pay to the relevant director for each company. Japanese data points calculated by taking the average compensation payable on an individual basis by dividing the total number of outside directors by the total compensation paid to all outside directors.
