Can greed be good? Carlos Ghosn, CEO compensation and a skeptical Japanese public

by Cory Baird

Staff Writer

After Carlos Ghosn’s shocking arrest Monday, many of his most ardent supporters were left to reconcile their positive image of the man said to have saved Nissan Motor Co. against the possibility he may have committed numerous crimes.

But over the next few days, as details of the case emerged, the scandal appears to be less an aberration and more a replay of the one thorny issue on which Ghosn often tussled with shareholders, the media, and his own employees: Can greed be good?

Despite being regarded as the man who brought back Nissan from the brink of extinction, Ghosn has for years faced skepticism amongst the Japanese public over whether he, or any company head for that matter, was worth a massive paycheck.

While there is no consensus as to the long-term merits of paying executives bonuses based on company results — a policy pushed for by Prime Minister Shinzo Abe’s government — at least in the short term many are likely to remain skeptical of the benefits of greed in driving results.

Ghosn’s first clash with Japan’s unique views on compensation and corporate life began not long after his arrival at Nissan in 1999. He initially faced pushback over his plan to link pay with performance, a natural proposition to many Western observers but still a rare practice among traditional Japanese firms.

“Like other Japanese companies, Nissan paid and promoted its employees based on their tenure and age. … Inevitably that practice bred a certain degree of complacency, which undermined Nissan’s competitiveness,” Ghosn wrote in an article published in the Harvard Business Review in 2002.

“We also revamped our compensation system to put the focus on performance,” he wrote. “In the traditional Japanese compensation system, managers receive no share options, and hardly any incentives are built into the manager’s pay packet … we changed all that.”

And the changes on compensation were extended to Ghosn’s own pay packet at Nissan, a figure that in 2014 climbed beyond ¥1 billion, far outpacing his Japanese peers.

The plan to turn Nissan around also included cutting jobs and streamlining inefficient business practices.

“There were societal criticisms (of Ghosn’s salary) in the French government, and even within Nissan. So if he took more salary he would have received more criticism, which is certainly one motivation for covering up his real compensation,” said Hideaki Miyajima, a professor of commerce at Waseda University.

“But because he revitalized Nissan and made it into the company it is, when he took a high salary the stock market did not react negatively to his payouts,” Miyajima said, explaining that market reaction can be one metric as to whether an executive is overpaid.

Although his lavish pay made waves in the country, it was still well below levels seen in the United States, a fact that Ghosn would often point out at annual shareholder meetings.

General Motors Co. CEO Mary T. Barra, for example, hauled in close to $22 million in 2017, $13 million of which came in the form of stock incentives, according to data from AFL-CIO Executive Paywatch.

Those kinds of stock rewards were what Ghosn pushed for in his own pay.

Forty-eight percent of CEO compensation in Japan is derived from the base salary compared to 28 percent in France and 10 percent in the U.S., according to an analysis of CEO pay in fiscal 2017 conducted by Willis Towers Watson, a firm specializing in executive compensation.

Ghosn, however, was not alone in pushing forward the idea that top-level workers should have the potential to increase their earnings.

The Abe government has pushed Japanese companies to tie executive pay to performance, incentivizing risk-taking among management as a part of a broader plan to reform the corporate sector.

The Ministry of Economy, Trade and Industry published a report in September titled “Executive Remuneration to Encourage ‘Offensive management,'” that compared Japanese executive compensation to pay levels in other industrialized nations and also outlined ways to offer remuneration beyond only base salaries.

“Currently, there are few companies in our country that introduce performance-linked remuneration for the medium- to long-term, and incentives for improving performance are not working sufficiently.”

“We need to escape from low-risk low-return, improving ‘earning power,’ ” the report continued.

Takuji Saito, a professor specializing in management at Keio University, agreed that the lack of performance-based pay was at least one factor leading to risk aversion amongst some Japanese companies.

“Even if Japanese managers improve the company’s performance, they will not be rewarded. But on the other hand if they make things worse, they could be fired,” Saito said.

“Under these circumstances, the management will aim to be safe, while not taking risks.”

One often cited example of Japanese corporate timidness is the eye-popping ¥259 trillion in cash held by nonfinancial companies as of September, according to Bank of Japan data.

Correspondingly, this has led to an average return on equity of around 8 percent for Japanese companies, far lower than U.S. companies which average around 15 percent, according to a 2018 study released by the Policy Research Institute, the official research arm of the Finance Ministry.

Return on equity is a key measure of profitability for the corporate sector.

But even in the U.S., where massive pay packages are more widely accepted, the line where greed becomes detrimental is a subject of intense debate.

An influential academic paper published in 2016 found that for companies listed on U.S. stock exchanges, “Measures of Chief Executive Officer (CEO) excess compensation are negatively related to future firm return.”

The paper, published by a team of researchers from the University of Utah, Purdue University, and the University of Cambridge, also found that “Overconfident CEOs receiving high excess pay undertake activities … that lead to shareholder wealth losses.”

Psychological research, conducted in a lab and published in “The Review of Economic Studies” in 2009, also found that “with some important exceptions, very high reward levels” can have “a detrimental effect on performance.”

The reality is that at least some type of extra push for performance is likely to play a role in motivating workers, but as research has shown, the fine details of how pay is distributed is likely an important factor in determining whether a large salary is motivational or detrimental.

Zuhair Khan, an equity analyst at Jefferies in Tokyo, said his own analysis shows that in Japan pay linked to performance appears to be beneficial for a company’s bottom line.

“Companies where all board members own around a million dollars worth of shares outperform massively year after year,” he said.

However, Khan added a key caveat: “What is important is that not just one person owns a lot of shares, as was the case at Nissan.”

While Waseda University’s Miyajima acknowledged that the Ghosn scandal may serve as fodder for those pushing back against the practice of rewarding employees through performance, he rebutted the notion that there are no benefits of incentive-based compensation.

“In Ghosn’s case, he was going beyond the legal paths to receive higher pay,” Miyajima said.

“In the usual case, the company’s board could stop this behavior, but the largest problem is that they didn’t have the system to stop his greed.”