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Executive pay in Japan seeks to improve corporate value

Highlights from a 2023 analysis of CEO and outside director pay

By Takaaki Kushige , Yuki Sato , Johnathon Brown and Keiko Kanda | January 18, 2024

This analysis is based on publicly available data for over 400 companies in Japan, France, Germany, the U.K. and the U.S.
Executive Compensation
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A recent analysis of CEO and outside director pay found that total CEO pay increased in Japan by 33% compared to the prior year. While this remarkable rise was driven by an increase in all compensation elements (base salary, annual incentive and long-term incentive), the jump in long-term incentives was particularly high — a 63% increase on the prior year. Furthermore, the ratio between fixed and variable pay reached 1:2 for Japanese companies in the 2023 analysis.

Other findings from the analysis include:

  • Total CEO pay in the U.S. and Germany decreased year-over-year (in local currency), primarily due to subdued annual incentive payouts compared to the prior year.
  • Total CEO pay in the U.K. and France increased year-over-year (in local currency) as a result of increased use of long-term incentives in both markets and a rise in base salary in the U.K. market.
  • Outside director pay in the U.S., German and French markets increased between 1~4% over prior year.
  • Outside director pay in the U.K. decreased approximately 2% compared to prior year.
  • Pay for outside directors in Japan increased approximately 6% compared to prior year.

CEO compensation analysis

Year-over-year, total CEO compensation decreased in the U.S. and Germany, while total CEO compensation increased in the U.K., France and Japan1 (on a local currency basis for each market) (Figure 1).


This result differs from WTW’s 2022 analysis of CEO pay, where CEO compensation was on an increasing trend in all five markets (Figure 2). While some degree of variance from the prior year was observed primarily due to changes in annual incentive payouts, which tend to be more susceptible to significant increases/decreases year-over-year, the overall trend of CEO compensation rising above, or at least remaining at a relatively consistent level with the prior year is unchanged from the findings of this study in prior years.

CEO compensation trends over three years
Figure 2. CEO compensation trends over three years

The most significant increase was in the Japanese market, where median total compensation reached JPY 271 million (up approximately 33% from JPY 200 million in the prior year). The change was largely due to the expanded use of long-term incentives in fiscal year 2022 leading to a pay mix of roughly equal parts (1:1:1) base salary, annual incentive, and long-term incentives among Japanese CEOs.

The increased use of long-term incentives may have also been partially a result of the Tokyo Stock Exchange publishing2 a series of requests to Japanese companies listed on the prime market geared to take "action to implement management that is conscious of cost of capital and stock price". This has led to a wide range of stakeholders seeking an improvement in corporate value for Japanese companies over the mid-to-long term. Specifically, stakeholders are looking for companies to achieve return on capital that consistently exceeds cost of capital on an ongoing basis. The increased use of long-term incentives at Japanese companies observed in this year’s analysis may have been in response to these expectations with a view to improve the link between pay and the interests of stakeholders.

As Japanese companies continue to take steps towards managing their businesses in ways that are conscious of, and promote stock price, it will not only be critical for companies to consider increasing the quantum of their long-term incentive awards but will also be prudent for the structure of long-term incentives programs (performance-linkage and appropriate stretch of performance measures) to be considered on an ongoing basis.

Outside director pay analysis

According to the analysis, total outside director pay in Japan had the largest year-over-year change with a 6.3% rise in fiscal year 2022 (in local currency terms) (Figure 3).


With compensation levels for outside directors in Japan continuing their rising trajectory as seen in the three-year trend for outside director pay (Figure 4), the use of stock to compensate outside directors is also gaining traction, with approximately 13% of companies covered in the study currently granting stock compensation to their outside directors. This result represents the highest percentage of companies using stock compensation for outside directors in Japan since the first iteration of this annual study.

Outside director pay trends over three years
Figure 4. Outside director pay trends over three years

Institutional investors typically have stringent proxy voting guidelines relating to the use of stock compensation, and in some cases oppose the use of stock for outside directors regardless of how the award is structured. However, proxy voting guidelines/policies differ from investor to investor and in some cases, stock compensation for outside directors is accepted and even viewed as positive on the condition that they are free of performance hurdles (i.e., not performance-linked) and awards are full-value at the time of grant (i.e., are not deeply discounted stock options).

The use of long-term incentives to increase outside director pay in Japan may be a reasonable approach in the future, but it is unclear whether institutional investors will view this as a positive development. To increase acceptance of stock compensation for outside directors among stakeholders, a sufficient degree of engagement on its benefits may be necessary.

Furthermore, when considering market practice for outside director pay in the U.S. and Europe, there is potential for Japanese companies to consider compensating outside directors serving as Board Chair at a higher level than other outside directors on the Board. However, this is contingent on the heightened compensation being reflective of the increased roles and responsibilities of a Board Chair.

One of the main reasons that higher compensation for Board Chairs is accepted among U.S. and European companies is due to the expansive disclosures outlining the pay of outside directors which include a breakdown of compensation payable to each director on an individual basis. As such, if Japanese companies elect to compensate Board Chairs at a higher level going forward, the first step to securing support and acceptance among stakeholders would be to commit to detailed disclosure of their outside director pay programs at a granularity comparable to Western markets.

Looking ahead

Executive compensation practices in Japan continue to evolve and diversify and will likely continue to shift as stakeholders increasingly place pressure on Japanese companies to improve corporate value over the mid-to-long term. For Japanese companies to achieve improved corporate value in the future, it will be critical for companies and institutional investors to engage on a wide range of topics including approach to executive compensation and wider corporate governance matters that will support growth and performance over the mid-to-long term.

This press release is adapted from a Japanese press release dated August 17, 2023.

About the study

CEO pay data was compiled by WTW Global Executive Compensation Analysis team using public disclosures. Details of the analysis and basis of representation are as follows:

  • U.S.: CEO Analysis – Median of Fortune 500 companies with revenue above JPY 1 trillion (400 companies)
  • Outside Director Analysis - Median of companies in the Fortune 500 and S&P 500 with revenue above JPY 1 trillion (215 companies)
  • U.K.: Median of FTSE 100 companies with revenue above JPY 1 trillion (46 companies)
  • Germany: Median of DAX constituents with revenue above JPY 1 trillion (35 companies)
  • France: Median of CAC 40 companies with revenue above JPY 1 trillion (37 companies)
  • Japan: CEO Analysis - Median of top 100 companies by market cap and with revenue above JPY 1 trillion and had submitted Securities Reports at the time of analysis (76 companies). Pay mix is calculated using the average value of 68 companies (76 company peer group excluding outliers). Annualized retirement allowance included in long-term incentive Outside Director Analysis: Median of top 100 companies by market cap with revenue above JPY 1 trillion (76 companies)
    • Cases where annual pay data was not available (due to partial year tenure) are treated as outliers and removed from the analysis.
    • 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.
    • For Japanese outside directors, the average compensation payable is calculated by dividing the total compensation payable to directors at each company under analysis divided by the number of recipients (1 data point per company); for 2 companies that did not disclose outside director pay, data was compiled using the average of compensation payable to outside officers (i.e., outside directors and outside corporate auditors).
    • Percentages in brackets represents the year-on-year change (in local currency) in compensation from the 2022 analysis of CEO and outside director pay.
    • Compensation data in figures 3 and 4 converted to JPY from local currency individually for each year under analysis
    • Exchange Rates: 2022 Average TTM rates (USD 1 = JPY 131.43; 1 GBP = JPY 161.92; 1 EUR = JPY 138.04)

Footnote

1 Furthermore, due to the weak JPY, when comparing compensation levels converted to JPY against prior year results, total CEO compensation increased in all markets except for Germany that experienced a decrease to total pay.

2 Tokyo Stock Exchange "Action on Cost of Capital-Conscious Management and Other Requests"

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