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Japan: No Model for Executive Compensation


Japan Inc. may have managed to keep CEO pay packages in check, but is the corner office sufficiently accountable?

Tokyo - As the debate over executive pay rages in the U.S., some might point to Japan as a model for reining in bloated compensation. CEOs at Japan's 100 biggest companies earn an average of $1.5 million a year, compared with $13.3 million for leaders of big American corporations, according to consulting firm Towers Perrin.

But that doesn't mean Wall Street should imitate the Japanese, compensation experts say. Pay in Japan has more to do with seniority than performance, so there's scant incentive for executives to do what's right for shareholders. On average, only about a third of Japanese executive income is from bonuses linked to financial metrics, Towers Perrin estimates. In the U.S., it's about 80%. "If [executives] aren't paid enough, they feel they can't be blamed for bad performance," says Takaaki Eguchi, a strategist at asset manager Barclays Global Investors.

So Japanese executives rarely get fired or quit when their company falters. If profitability takes a big hit, the boss gets ousted less than 6% of the time, far less than in the U.S., Waseda University professor Katsuyuki Kubo figures. And a double-digit annual stock gain nets Japanese bosses an average of $22,000, vs. $1.8 million in the U.S., Kubo says. "Financial incentives in large firms are more like those for bureaucrats," he says.

Some companies have started to change the way they pay executives. At cosmetics maker Shiseido, the compensation committee is now headed by outsiders who have recommended tying 60% of the CEO's pay to performance. And more executives are volunteering for pay cuts when profits plunge. Sony (SNE) is halving salaries for CEO Howard Stringer and his top lieutenants. Honda Motor (HMC) board members will see their pay reduced by 20%, and the head of Japan Airlines cut his pay to half that of the carrier's pilots.

There are cultural barriers to fatter paychecks in Japan. They're frowned upon by the public, and many executives fear higher salaries for some would disrupt group harmony, especially since management decisions are often made by consensus.

A bigger problem may be a general lack of transparency. Inadequate rules on disclosure mean companies can get away with not revealing what top bosses earn, says Koji Morioka, head of a group called Shareholders Ombudsman. "Investors should have the chance," he says, "to judge whether executive pay is too high or too low."

Hall is BusinessWeek's technology correspondent in Tokyo.

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