Relation between Top Executive Compensation Structure and Corporate Governance: Evidence from Japanese Public Disclosed Data

Abstract

Manuscript Type Empirical Research Question/Issue This paper explores the incentive structure of executive compensation in Japan in 2010, when Japanese individual executive compensation data for those receiving more than 100 million Japanese yen were made public for the first time. This public disclosure enables investigation of the relation between cash‐based and stock‐based individual incentive compensation and corporate governance mechanisms in Japan. Research Findings/Insights Results show that 1) the bank ties do not substitute for incentive compensation, unlike in the 1990s in Japan, when they were effective for solving agency conflicts; and 2) the role of incentive compensation is found to be effective for firms with a higher degree of foreign ownership. We also examine the role of the new internal control mechanism of firms with a committee system which includes a compensation committee for facilitating incentive compensation. However results show that internal control systems of firms with committees only facilitate short‐term incentive packages because they fall into short‐termism as a result of their short duration of a single year. Theoretical/Academic Implications Theoretically, bank ties do not contribute as a substitute for incentive compensation to align management and shareholder interests under a Japanese relationship‐oriented system. This implies that Japanese relationship‐oriented systems would have been weakened by solving agency conflicts. Furthermore, firms with committee systems can no longer provide managerial incentives because of the short‐termism of committee members. Practitioner/Policy Implications This study provides insights for practitioners and policymakers interested in executive compensation structures in any country where corporate governance is reformed to introduce Anglo‐American mechanisms.

“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.…”

“…Average bonus ratios varied between 24 % and 28 % over the period from 1997 to 2005 according to a study conducted by Hongo (2010). Sakawa et al (2012) analyze the pay structure based on individual compensation data of 312 directors from 200 listed stock companies that had been reported under the new disclosure rules. Each director had earned more than 100 million yen in the fiscal year 2010.…”

“…4 On the difficulties of measuring executive compensation in a comprehensive and systematic way, see Murphy (2012: 5-24). For the Japanese situation, see Sakawa et al (2012). 5 Until 2005, the government had disclosed the identity and total tax bill of persons paying more than 10 million yen in income tax (Nakazato et al 2011: 848).…”

“…However, other items such as accrued pension benefits, health insurance, special allowances, or non-monetary benefits are not reported. 4 Faced with the lack of disclosure, researchers applied basically five strategies to obtain information on executive pay in Japan: -work with disclosed aggregate cash compensation data averaged by the number of board members (Kaplan 1994;Ang and Constand 1997;Abe et al 2005;Kubo 2005;Murase 1998); -deduce individual pay levels of the CEO or other executive board members based on information of the composition of boards and typical pay gaps between board positions (Kubo and Saito 2008;Sakawa and Watanabe 2008); -use publicly available personal income tax data to arrive at individual pay levels (Kato and Rockel 1992;Kato 1997;Basu et al 2007;Nakazato et al 2011); 5 -use data from private surveys (Kato and Kubo 2006); -focus on top earners whose compensation packages are reported individually since 2010 (Sakawa et al 2012). …”

Regulating Executive Compensation in China: Problems and Solutions

“…195 In Japan, executive compensation amounts were not disclosed publicly before 2009. 196 Individual compensation packages for executives receiving more than 100 million Japanese yen were not made public until 2010. 197 One might further argue that the prevalence of excessive executive compensation in the U.S. indicates that their stringent disclosure requirement does not work effectively to solve the problem.…”