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No Outcry About CEO Pay in Japan

In recent weeks, the news from Japan Inc. has been a steady drumbeat of layoffs, plant shutdowns, and gloomy earnings forecasts. Yet few CEOs have been shown the door. And there are scant signs that the public and political outcry against CEOs' fat pay packages in the U.S. will be echoed in Japan.

That's because most Japanese chief executives don't earn anywhere near the big paychecks of their Western counterparts. CEOs at Japan's top 100 companies by market capitalization earned an average of around $1.5 million, compared with $13.3 million for American CEOs and $6.6 million for European chief execs at companies with revenues of higher than $10 billion, according to an analysis of 2004-06 data by Towers Perrin, a Stamford (Conn.) human resources firm.

It shows, too. Japan's corporate bigwigs might travel around in chauffeured cars and play golf on the company's dime, but they don't trot around in designer suits, shuttle between cities in private jets, or order up multimillion-dollar houses. And the moment the company's profits plunge, they often take one for the team. Last month, Sony (SNE) announced plans to halve the pay packages for Chairman and CEO Howard Stringer and his top lieutenants, while Honda (HMC) has said its board members will take a 20% pay cut.

Diminished Sense of Responsibility?

Is it time for Americans, then, to imitate the Japanese? Executive compensation experts wouldn't advise it. Japan's system is hardly ideal, they say. In fact, many Western investors argue that Japanese executives get paid too little and that performance should be a bigger factor in determining compensation packages. On average, only about a third of Japanese executives' income comes from stock-option grants (which weren't possible until deregulation in the late 1990s) and bonuses linked to financial metrics such as return on equity and revenue growth, says Naohiko Abe, head of Towers Perrin's Japan office.

Contrast that with the U.S., where the ratio is around 80%, and Europe, where it's 60% to 70%. "If they're not paid enough, they feel that they can't be blamed for bad performance," says Barclays Global Investors strategist Takaaki Eguchi. "As investors, we want a system where they're sufficiently paid but also take full responsibility for what they've done."

There are a few signs of a shift toward the West. Cosmetics maker Shiseido, for instance, now appoints outside executives to head its board's compensation committee, which sets executive pay. And more than half of Shiseido executives' pay is affected by the company's stock valuation and a slew of earnings benchmarks. Says UBS (UBS) analyst Hirohisa Shimura: "Potentially it might help Shiseido bring in globally minded directors. To do that, you need to pay more."

There are still plenty of holdouts, though. Barclays' Eguchi says senior executives often express their worries that any attempt to raise CEO pay would be frowned upon by the public and voted down by Japanese shareholders.

Towers Perrin's Abe figures only about a third of the biggest Japanese companies follow Western-style compensation practices or are leaning toward doing so. "We still need more pressure on companies from Japanese institutional investors, not just overseas investors," says Abe. Still, that's an improvement from a decade ago, when only a handful of companies in Japan were even issuing stock options.

Insular and Opaque

One reason change has come slowly to Japan Inc. is the insular nature of corporate boards. Directors are typically company insiders whose entire careers have been spent climbing the corporate ladder. The same goes for the CEO, whose two- to four-year term is usually followed by a stint as chairman and later a few more years on the payroll as senior adviser. Even when a company has a bad year, the board rarely votes to oust the boss, says Waseda University professor Katsuyuki Kubo. Last December he co-authored a paper in Japanese Economic Review that relied on two decades of data to show there's little correlation between Japanese executives' compensation and their firms' return on assets—which measures how efficiently a company uses its assets to generate profits. "Japanese presidents aren't rewarded for improving shareholder value. Our data show that U.S. CEOs get paid about 100 times more for raising shareholder value than Japanese presidents," says Kubo.

Transparency might help, too. Unlike in the U.S. and parts of Europe, Japanese securities rules don't force companies to give a breakdown of individual executives' annual pay. Instead, companies release aggregate income figures, which don't shed much light on how much execs are paid or how their compensation is calculated. On this, not even a global giant like Sony—which experts applaud for its progressive compensation practices—has budged. Sony reported last year that it paid its seven senior executives $22 million in salary and performance-related bonuses, but it doesn't offer a breakdown. For the past six years, Sony's board has rejected a proposal submitted by the Osaka-based shareholder activist group Shareholders Ombudsman to disclose compensation figures for the company's top five executives. Last year, the proposal won support from less than 40% of shareholders, far short of the two-thirds majority it needs to pass.

Hall is BusinessWeek's technology correspondent in Tokyo.

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