Japan’s CEOs: underpaid and underwhelming

by and

Bloomberg

If you want to know why many Japanese chief executive officers fall short as leaders, look no further than how they are paid.

That is the view of Atsushi Saito, who ended an eight-year stint as head of Japan Exchange Group Inc. in June. Japanese CEOs are underpaid, according to Saito. Not only that, most of their salary is fixed regardless of performance, and they will not make bold decisions for fear of missing out on cushy adviser roles after they retire, he says.

The solution: pay them more, link compensation to the share price and part ways when they step down.

“Right now there isn’t much attraction to being a CEO,” said Saito, 76, who is currently nonexecutive chairman of private-equity firm KKR Japan Ltd., where he works two days a week. “What competent person would do the job?”

The median CEO salary at Japanese companies with revenue of more than ¥1 trillion is one-tenth of counterparts in the U.S., and incentive pay makes up just 14 percent of the total, against 69 percent in America, according to advisory company Towers Watson. Most CEOs in the Nikkei 225 stock average get less than ¥100 million a year.

While Saito sees the high compensation levels in the U.S. as “sick,” he says Japanese businesses should give CEOs at least ¥200 million a year, to encourage more risk-taking and also attract better people.

Japanese equities rallied in 2015 in part because of investors’ convictions that Prime Minister Shinzo Abe will help reinvigorate a stagnant economy and business environment.

While there are signs the government’s push for corporate government practices and higher profits are making an impact, critics including Goldman Sachs Group Inc. say the changes do not go far enough.

Adequate compensation is the “missing carrot” in Japanese governance reforms, Goldman said in an October report, citing the low level of incentive pay.

The firm argued that Japanese tax laws should be revised to allow more performance-linked pay, while compensation details should be made more transparent. It noted that reforms in Germany after 1998 resulted in a closer linkage between executive compensation and corporate performance.

One of Saito’s last acts while running the stock exchange was to design a corporate governance code for Japan Inc. The set of rules that started applying to listed companies in June says management’s pay should include incentives to promote “healthy entrepreneurship.”

“I want CEOs to have Inamori san or Nagamori san’s spirit,” says Saito, referring to Kazuo Inamori and Shigenobu Nagamori, the founders of Kyocera Corp. and Nidec Corp., both of whom are known for their dynamic management styles. Cushy advisory roles should be abolished, but “whether it’s pension plans or stock options, it doesn’t matter — CEOs should be paid more.”

Current CEO wages are kept low because there is a “tacit understanding” corporate leaders will be kept on the payroll as advisers for many years after they step down. CEOs often think “if I fail, I can’t be an adviser and get the lifetime compensation that’s my due,” says Saito. “A lot of management’s based on not wanting to throw that away.”

Saito also criticizes activist investors who only look at short-term profit, and think that they can be aggressive because of changes in corporate governance. “They’re abusing a system that’s based on goodwill, using it for private, selfish profit,” he says.

But he notes that their importance is limited. “There are millions of investors in the world, and there are only a handful of activists.”

While Saito’s view on pay aligns with U.S. investors including Warren Buffett, he is not advocating compensation at the levels typically given to America’s corporate leaders.

He says the wealth of the 1 percent in the U.S. cannot be condoned. The wealth gap among U.S. companies is increasing, as 18 American businesses held 36 percent of corporate wealth in 2013, up from 27 percent in 2009, according to a report from Standard & Poor’s.

Carlos Ghosn, CEO of Nissan Motor Co., one of Japan’s largest carmakers, has the highest salary among companies on the Nikkei 225, while Masahiko Uotani, head of cosmetics company Shiseido Co., has the lowest among companies that disclose CEO compensation levels, according to data compiled by Bloomberg. Companies are only required to publish board member wages when pay levels are above ¥100 million.

Not all CEOs are risk-averse journeymen, according to Saito. In addition to Kyocera’s Inamori and Nidec’s Nagamori, he cites SoftBank Group Corp.’s Masayoshi Son and Fast Retailing Co.’s Tadashi Yanai as examples of CEOs that are successful entrepreneurs.

SoftBank shares under Son have soared 14-fold over 18 years, while Fast Retailing has risen nearly 7,000 percent since it listed in 1997. Both Son and Yanai are among the 50 highest-paid CEOs on the Nikkei 225.

These CEOs are exceptions, Saito says, and it is partly cultural because most Japanese people are uncomfortable with standing out.

“If someone like Steve Jobs was in Japan, how would the Japanese treat him?” Saito said. “If he had joined a large Japanese company, he probably would have been fired immediately.”

  • KenjiAd

    People are naturally afraid of failure, becoming a loser. But there is a peculiar problem in the Japanese society or Asian societies for that matter.

    The Japanese society tends to define “success” too narrowly – usually along the line of getting a high test score, into so-called famous university, a job at a well-known company, and so on. If you define success so narrowly, you are defining failure too broadly.

    There are too many opportunities to be a loser in this kind of society; what if you couldn’t get into a famous university? You would be seen a loser, or that’s how you would feel.

    So people then start avoiding risks and possible blames, rather than taking chances and responsibilities for your action. This tendency is not just limited to CEOs. You can see it at every rank.

    I think people in Japan from a young age should be told that there are many ways to succeed, and more importantly, failure is an integral part for their ultimate success.

    • 69station

      That’s an interesting analysis. Coming from Britain, I have actually had a different impression of Japan’s education system. I have observed that, compared to my experience in the U.K., far more Japanese have a belief that they have a genuine chance through the education system, if they just devote themselves. I have also observed that there is far less resentment among adults at perceived insurmountable inequalities in access to success and wealth. A good example would be Oxford University, considered to be the finest in the UK, which actually gets far fewer applications per place than any other university. The reason for this is that many potential applicants have long since eliminated themselves from believing that they could possibly succeed. Fortunately, Japan, like the US, seems to have much less of this.

      I don’t believe that any tendency there may be to avoid taking risks and earning blame is due to people considering themselves to be losers. It is sufficient to acknowledge that doing so may result in less career success (i.e. promotions) and does not require additional explanation. If it is true that risk-taking needs to be increased, then the solution is a change in how corporations reward employees.

      Your point about it needing to be known that there are many ways (other than through the top education/top company route) is well-taken. Kinf of ironic too, as the vast majority of businesses in Japan are actually small ventures.

      • KenjiAd

        First, a little disclaimer and self introduction. I was born in Japan, went through the Japanese education system up to a graduate school (science), and then left Japan 30 years ago. I went to the US as a postdoc. I hadn’t planed to, but ended up spending the bulk of my adult life in America. I’m now living in China (4 yrs and counting). So I don’t really know what is going on in Japan these days. At the same time, I believe the culture doesn’t change quickly; comparing Japanese with American culture is always interesting to me.

        A term like “risk taking” is glorified in the US but can be misleading. Those who are taking risks are doing it, mainly because they believe in a higher ROI (return on investment) in taking certain risks than not taking the risks at all. They are not sticking their hand into a dark hole, so to speak, not because of the thrill of it, but because they mind find gold in there.

        Using this dark-hole analogy, I think there are two reasons why fewer Japanese people would stick their hands into the hole.

        One, in the traditional Japanese culture, financial success (finding gold in the hole) often comes with social stigma. In other words, getting rich would come with a social penalty of sticking out of the crowd. This penalty never exists in America (unless your name happens to be Trump).

        Two, in Japan, if you stick your hand into the dark hole (i.e., taking risks) and gets bitten by a spider lurking in the dark, you would probably be characterized as someone irresponsible or stupid (or both). Americans on the other hand glorify this sort of “stupidity.”

        A long time ago (1962), a young Japanese guy named Horie Kenichi sailed across the Pacific Ocean and reached San Fransisco, the first ever. Since Mr Horie didn’t have a visa to visit America, it was technically illegal for him to step on the land of San Fransisco. But the SF mayor gave him a hero’s welcome.

        What did Japan do? When Horie came back to Japan, the police arrested him for leaving country illegally and “making trouble.”

        I know that Japan has changed since Horie’s adventure, but I doubt the undercurrent culture has changed that much. They simply penalizes adventure, calling it irresponsible.

    • kyushuphil

      Thanks, Kenji — but we can be more specific on “many ways to succeed.”

      Teachers in the social sciences and humanities in classes especially could cite many more references to novels, films, songs, poems — they could enlarge the array of perspectives on any single topic.

      They could ask for more essays from students also reaching out more to avail themselves of more human and cultural examples.

      This wider context could thus celebrate the subtleties and rich complications people experience in “success.” This would also let people see more humanity in what are now perhaps too limited views of institutional and social issues.

      Why don’t teachers do this? Does everyone learn to shear oneself of imagination, of humanity (and of all the humanities) in the rush to conformism?

      • KenjiAd

        I agree with you. While I used to be a scientist by profession, I was (still am) interested in history, literature, and social sciences in general. These humanity fields have a certain breadth that science and technology can’t capture.

        But when I was a student, I never enjoyed humanity classes. The teachers and professors gave a lot of information and facts, none of which turned into real knowledge and wisdom.

        Although I’m no loner a research scientist, I still teach at a university here in China. In my class dealing with genetics, I try to teach not just equations and theories, but also stories of the scientists who discovered them. They seem to like it very much.

        I usually end my biology class with a quote from a famous physicist Richard Feynman: “You have no responsibility to live up to what other people think you ought to accomplish. I have no responsibility to be like they expect me to be. It’s their mistake, not my failing.” I wish that to my students and I wish that to myself, too. lol

      • kyushuphil

        Thank you for your Feynman quote.

        Thank you, too, for your note on how inherently boring humanities classes were for you back then. You could easily add, as contrast, not only Feynman, but any number of other top scientists throughout the history of science.

        So typically serendipitous they were. In addition to their diligence in the basics, they could and did often branch out — to make unusual connections, to see things in new contexts, as if anything in any science were alive, vitally so, for all the perspectives which only added meaning and possibility.

        It’s true today, as you know. Top-level physics, math, and life sciences often veer very close to philosophy — their thinkers relishing interdisciplinary opportunities.

        One analogy would be musicians, and other artists in other humanities, who often borrow from and build on things from other areas — other genres.

        So sad, that the academy today worldwide is infested with the imaginatively dead in most all careerist academic “humanities,” and more dead in all the depersonalized social sciences.

        But in hard sciences such as yours, and in actual humanities in so many fields themselves (including some novel and noir writing in Japan), life abounds. Maybe that’s some consolation — or prod — for us.

    • kyushuphil

      Thanks, Kenji — but we can be more specific on “many ways to succeed.”

      Teachers in the social sciences and humanities in classes especially could cite many more references to novels, films, songs, poems — they could enlarge the array of perspectives on any single topic.

      They could ask for more essays from students also reaching out more to avail themselves of more human and cultural examples.

      This wider context could thus celebrate the subtleties and rich complications people experience in “success.” This would also let people see more humanity in what are now perhaps too limited views of institutional and social issues.

      Why don’t teachers do this? Does everyone learn to shear oneself of imagination, of humanity (and of all the humanities) in the rush to conformism?

    • kyushuphil

      Thanks, Kenji — but we can be more specific on “many ways to succeed.”

      Teachers in the social sciences and humanities in classes especially could cite many more references to novels, films, songs, poems — they could enlarge the array of perspectives on any single topic.

      They could ask for more essays from students also reaching out more to avail themselves of more human and cultural examples.

      This wider context could thus celebrate the subtleties and rich complications people experience in “success.” This would also let people see more humanity in what are now perhaps too limited views of institutional and social issues.

      Why don’t teachers do this? Does everyone learn to shear oneself of imagination, of humanity (and of all the humanities) in the rush to conformism?

  • 151E

    Good grief!

    (1) Japan should take any advice from the likes of Goldman Sachs with a healthy pinch of salt.

    (2) If the performance of Japan’s CEOs is underwhelming, it’s strange to argue then that they are underpaid.

    (3) When compensation is coupled to stock valuation, instead of focusing on sound long term strategy, CEOs are effectively incentivised to concentrate on whipping-up unrealistic short-term investor expectations, and then cash out before the inevitable price correction.

    • Peter

      I agree with you on points 1 and 3, but not on point 2. Ever heard the adage “pay peanuts, get monkeys”? Of course 100m yen is not peanuts, but I think it is a fair argument that if more money was offered then better talent would be attracted.

      • 151E

        While that argument indeed has merit, and you may not be able to entice Jack Welch out of retirement nor lure Eric Schmidt away for a “paltry” 100m yen p.a., there are plenty of potentially equally capable Japanese salarymen who would be willing to do the job. I suspect the biggest barrier to filling the position of CEO with more visionary and less risk-adverse candidates would be an excessively conservative board of directors. But I may well be wrong.

  • Takaharshi

    they are right, the problem lies in the way they are paid (through being an advisor for life even post retirement) why take risk if im set for life. why stake everything when there is nothing to gain but everything to lose. On that note so they are basically saying companies should be paying MORE to executives to get advice from advisors on how to be conservative and take no risk? makes perfect sense.

  • Sepp W. Faessler

    In Switzerland we had a similar discussion about 3 years ago!

    I quote Swissinfo:

    Swiss voters have rejected a proposal limiting the salaries of top executives. About two-thirds of voters said no to the Young Social Democrats’ plan. The aim was to reduce the salary gap to a 1:12 ratio – to limit the salaries of top
    executives based on the annual minimum wage of the lowest paid employee within the same company.

    But Economics Minister Johann Schneider-Ammann was pleased with the outcome.”Switzerland´s economy remains competitive and attractive for
    investors.” He also warned the business community not to ignore the fact
    that – despite the vote result – there was dissatisfaction among the populace
    with excessive manager salaries. “They [executives] have to understand
    that social cohesion must not be put in jeopardy.”

    Etc.

  • Casper Steuperaert

    Anything more than a 2:1 wage gap in a corporation between lowest and highest paid is too much.

  • Stephen Kent

    When I started reading this article I had a feeling that Steve Jobs might get a mention, and lo and behold he popped up right at the end. Jobs, I feel, is the epitome of this era of CEO worship we are living in – an era in which someone who was essentially quite good at marketing and didn’t care whether people disliked him or not gets mentioned in the same breath as Albert Einstein by a US president. Give them more money, we are told; and the more money you give them the more they will bring to the masses through their innovative brilliance!

    I feel that in reality, however, the future is pretty bleak if the best idea that alleged experts can come up with is to give people who sit at the top of what are in effect totalitarian structures more money to take risks. We are now at a point in history where the innovation we need is not in the field of business or technology (except perhaps energy and medicine), but in society in general. The reason that Japanese companies are so reluctant to change, I think, is that companies exist not solely as entities to manufacture goods or provide services, but also for the purpose of providing people with access to the essentials of life in a socially and psychologically acceptable way. In other words, to allow them to “earn a living” and ensure social stability. I get the feeling that this is tacitly understood by companies in Japan, and the massive amounts of overtime that employees do seems like a collective call to management of “Look! We’re working and working hard, so you need to keep your part of the deal and ensure we have reasonable living standards!”. Management understands this, and that’s why, I feel, there has been a long period of stability and relative equality in post-war Japan. Employees get a reasonable standard of living, and management get to sit at the top of the pyramid, basking in the power and glory of their titles (which, in my experience, are very important to the higher ups at Japanese companies). Despite two “lost decades” Japan hasn’t collapsed, so why rock the boat? If CEOs feel they get enough money and are happy being respected because of their title and authority then there’s no reason to change anything. I suppose the biggest changes have come in the form of changes to labour laws to allow “flexibility” in dismissing staff in an effort to try and spur companies into changing their ways, but the only real effect this seems to have had is to create an army of temporary workers who work for companies that now sit on top of piles of cash that are bigger than ever before.

    Japan, and indeed most of the rest of the world, has yet to innovate a way of living that doesn’t involve aiming to have everybody working five days a week to obtain enough money to live while ensuring they have enough cash left over to consume and stimulate demand, thus creating work for everyone to do, regardless of whether or not the end product is necessary or not. This is the area in which we need innovation, because on a planet with finite resources, the current system is obviously unsustainable, so no matter how much money a CEO gets, he or she won’t do anything to solve this problem if their sole target is to raise stock prices for investors. Even if Goldman Sachs believe otherwise.

  • Gendaijin

    ¥100M is more than enough for a nice living, asking for more is just unhealthy greed. Great leaders understand the value of life and you won’t catch them with just a big check.

    The article is misleading when it cites founders such as Son to make a case for higher salaries. Son gets a great salary because he founded a hugely successful company, not the other way round.

    Linking salary to short-term performance is going to please shareholders at the end of the quarter but goes against long term development. Historically japanese CEOs have done a very good job developing successful and sustainable companies, why should they change?

    And society as a whole works much better when salary gaps are kept reasonable: healthcare, education, safety, arts, lively cities, all these things come for granted in Japan and are very expensive in societies with huge salary gaps. Even CEOs benefit from this.

  • Gendaijin

    ¥100M is more than enough for a nice living, asking for more is just unhealthy greed. Great leaders understand the value of life and you won’t catch them with just a big check.

    The article is misleading when it cites founders such as Son to make a case for higher salaries. Son gets a great salary because he founded a hugely successful company, not the other way round.

    Linking salary to short-term performance is going to please shareholders at the end of the quarter but goes against long term development. Historically japanese CEOs have done a very good job developing successful and sustainable companies, why should they change?

    And society as a whole works much better when salary gaps are kept reasonable: healthcare, education, safety, arts, lively cities, all these things come for granted in Japan and are very expensive in societies with huge salary gaps. Even CEOs benefit from this.

  • Gendaijin

    ¥100M is more than enough for a nice living, asking for more is just unhealthy greed. Great leaders understand the value of life and you won’t catch them with just a big check.

    The article is misleading when it cites founders such as Son to make a case for higher salaries. Son gets a great salary because he founded a hugely successful company, not the other way round.

    Linking salary to short-term performance is going to please shareholders at the end of the quarter but goes against long term development. Historically japanese CEOs have done a very good job developing successful and sustainable companies, why should they change?

    And society as a whole works much better when salary gaps are kept reasonable: healthcare, education, safety, arts, lively cities, all these things come for granted in Japan and are very expensive in societies with huge salary gaps. Even CEOs benefit from this.

  • Gendaijin

    ¥100M is more than enough for a nice living, asking for more is just unhealthy greed. Great leaders understand the value of life and you won’t catch them with just a big check.

    The article is misleading when it cites founders such as Son to make a case for higher salaries. Son gets a great salary because he founded a hugely successful company, not the other way round.

    Linking salary to short-term performance is going to please shareholders at the end of the quarter but goes against long term development. Historically japanese CEOs have done a very good job developing successful and sustainable companies, why should they change?

    And society as a whole works much better when salary gaps are kept reasonable: healthcare, education, safety, arts, lively cities, all these things come for granted in Japan and are very expensive in societies with huge salary gaps. Even CEOs benefit from this.