Executive pay in Japan: the role of bank-appointed monitors and the Main Bank relationship

Abstract

The tournament model has the feature that executive compensation depends on the wages paid to workers at lower levels of the corporate hierarchy. The agency model shows that compensation based on firm performance is a means by which incentives can be provided to executives once a promotion tournament has been resolved. In this paper, we combine aspects of both models and show that the existence of an outsider who monitors the firm's activities will lower the sensitivity of pay to firm performance for top executives and reduce the importance of tournament-based incentives. Using panel data for 56 Japanese electronics firms, we find support for the notion that bank-appointed Board members help monitor top executives and that tournament considerations are a particularly important feature of executive compensation in Japan.

Change and continuity in Japanese corporate governance

“…Their study finds that firms' appointments of outside directors are related to their external resource reliance. In contrast, studies by Abe, Gaston, and Kubo (2005), Kaplan and Minton (1994), and Morck and Nakamura (1999) suggest that directors appointed by banks play some monitoring role. Hence, we have two perspectives on the board structure.…”

Executive compensation in Asia: A critical review and outlook

“…In a study of 55 Japanese electronics firms from 1989 to 1999, Abe, Gaston, and Kubo (2005) report that the presence of bank-appointed directors reduces executive pay-performance sensitivity and the importance of tournament-based incentives. They suggest that executive pay in Japan will be better viewed from a tournament perspective, showing that executive pay represents the "prize" of a tournament in a promotion competition designed to motivate lower-level management.…”

“Company heroes” versus “superstars”: executive pay in Japan in comparative perspective

“…The majority focuses on the link between pay and performance and on how governance and ownership structures affect executive compensation. The most recent ones include Kubo (2005), Abe et al (2005), Kato and Kubo (2006), Basu et al (2007), Kubo and Saito (2008), Colpan and Yoshikawa (2012) and Sakawa et al (2012). Only a few studies undertake international comparisons.…”