On Dec. 10, Masaaki Tanaka, former vice president of Mitsubishi UFJ Financial Group, told a news conference he would step down as president and CEO of Japan Investment Corp., an entity set up by the government in September to develop new industries through capital investment.
Tanaka and eight other JIC board members resigned over the Ministry of Economy, Trade and Industry’s decision to pay them less than what it had initially promised. Economy minister Hiroshige Seko has pledged to return a month’s worth of his own pay for approving the original annual remunerations, which were more than ¥100 million if the investment was successful, and it’s not difficult to sense that the salaries might not have been an issue if former Nissan Motor Co. Chairman Carlos Ghosn’s own compensation wasn’t foremost in the news cycle at the time.
The conventional wisdom about executive pay is that companies are expected to offer sizeable numbers in order to attract and retain the best talent available, and that the fierce competition brought on by the increasingly global economy keeps driving these salaries higher. A corollary of this narrative is that Japanese executives typically don’t enjoy this benefit due to Japan’s corporate pay structure, and make less money than their foreign counterparts do.
Ghosn’s story seems to reinforce this subplot. Until his arrest last month over the alleged underreporting of his income and misuse of company funds, Ghosn had run Nissan Motor Co. in some capacity or another since 1999, but he is not Japanese and demanded what many people in Japan saw as an obscene amount of money in return.
According to the weekly magazine Shukan Asahi, five of the eight highest paid executives in Japan are foreign. Sony Corp. Chairman Kazuo Hirai earns the most at ¥2.7 billion, but foreign executives from the Softbank Group account for the next three spots, followed by Takeda Pharmaceutical Co. President Christophe Weber at No. 5 and Toyota Motor Corp. Vice President Didier Leroy at No. 8. Ghosn, who says his salary isn’t as high as most European executives, comes in 14th.
Web magazine Litera contends that this preponderance of foreign executives at the top of the pay pecking order is misleading, since Shukan Asahi ranks earnings based on salaries. If you include stock dividends, some Japanese CEOs outstrip Hirai in terms of compensation. Masayoshi Son of SoftBank Group will make ¥10.3 billion in fiscal 2019, according to business magazine Toyo Keizai. Fast Retailing’s Tadashi Yanai, who also doesn’t appear on the Shukan Asahi list, will make ¥8.3 billion. In both cases, dividends accounted for more than 90 percent of yearly compensation, which means in terms of base salary, they do fit into the Japan-executives-make-less corollary. However, they also figure into the global trend of the ever-widening income gap between top management of a company and its average employee. Shukan Asahi reports that Hirai makes 268 times what the average Sony worker makes.
Japanese executive compensation used to be more rational, but according to Litera, it started shooting for the stratosphere with the advent of the administration of Prime Minister Junichiro Koizumi in 2001. In that year average executive pay at Japanese companies capitalized at more than ¥1 billion was ¥14.25 million. By 2005, it had doubled to ¥28.1 million. The standard explanation is that from 2002 to 2007 economic growth was robust. But while executive salaries, stock dividends and retained earnings rose, average salaries for workers dropped due to the effect of new policies that allowed for greater reliance on part-timers, temps and contractors.
Another reason executive pay increased was stock prices. Traditionally, shareholders of top Japanese companies are other top Japanese companies, who don’t stick their noses in other companies’ business, but with the mini-bubble of the early 2000s more foreign investors entered the picture, putting pressure on Japanese companies to address their demands rather than those of their stakeholders, meaning employees and sub-contractors. They wanted executives who would boost share prices in the short term. These two developments — payroll rationalization and shareholder dominance — are classic attributes of neoliberalism, the core philosophy of the global economy. Japan had joined the club.
Litera says that under Prime Minister Shinzo Abe the pay gap is widening more quickly because the government is increasing the consumption tax but not the capital gains tax, while at the same time cutting the corporate tax. Although the media keeps saying that Japan’s inherent revulsion toward high pay such as that collected by Ghosn is what keeps executive compensation in Japan below world standards, they’re avoiding the larger picture. Maybe executive pay is lower on average, but the widening rich-poor gap that’s attendant to the inclination for higher executive pay in the U.S. and Europe is manifest in Japan, and for similar reasons.
Given his reputation in Japan as the “cost cutter” who saved Nissan by laying off 20,000 people after 2009, Ghosn is the perfect poster boy for this movement, and he’s clearly the inspiration behind a Financial Services Agency proposal that will oblige listed companies to disclose how they decide executive compensation packages. At present, all listed companies have to do is report total compensation and the names of executives who receive more than ¥100 million. Investors have always been critical of the lack of transparency in Japan, and the new rule will supposedly help them monitor performance and fortify governance, but in general it’s not always specified exactly what an executive has to achieve to justify such huge remunerations. According to FNN, when asked why he demanded so much money, Ghosn reportedly said, “I am worth it.”
In a Nov. 22 article about a lawsuit brought by former employees against Nissan over their dismissal, the tabloid Nikkan Gendai wondered if Ghosn really was worth it. Is the higher share price worth the pain inflicted by restructuring? Obviously Ghosn thinks it is, and believes he should be paid accordingly, regardless of whether he needs that much money. It’s what makes him CEO material.