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:
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.
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.
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.
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.
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.
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:
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"