Bernstein: Japanese Executive Pay Lags U.S. and Europe, Raising Governance Concerns
Bernstein says executive compensation at Japanese companies is significantly lower than at U.S.
Bernstein says executive compensation at Japanese companies is significantly lower than at U.S. and European peers. At pharmaceutical companies, chief executive pay averages just one-sixth of the level at those peers.
The firm attributes the gap to structural factors including Japan’s lifetime-employment culture, a relatively closed labor market and limited use of equity incentives. These factors have contributed to a mismatch between shareholder interests and management incentives, Bernstein says.
Japan is gradually increasing the share of equity-based executive compensation through governance reforms, but the proportion remains well below levels in the United States and Europe. Bernstein highlights that Japanese companies accelerate the granting of equity incentives and require executives to hold more shares to better align management with shareholder value and improve global competitiveness.
Bernstein’s conclusion is that Japan’s extremely low executive compensation is not merely a cultural issue but also a governance shortcoming. The disconnect between management incentives and shareholder interests is constraining Japanese companies’ efforts to improve their global competitiveness.
The note is neutral to moderately positive for large Japanese companies that actively advance governance reforms, because greater use of equity incentives could improve alignment with shareholder value. The market is already somewhat aware of Japan’s governance reforms, but the pace and effectiveness of improvements in compensation structures may not yet be fully reflected in valuations.
Potential catalysts identified in the note include new executive-compensation disclosure requirements from Japanese exchanges and regulators; announcements of changes to equity-incentive plans by major companies; changes in how foreign institutions rate Japanese corporate governance; and validation of the relationship between changes in Japanese companies’ return on equity and executive-compensation structures.
The firm attributes the gap to structural factors including Japan’s lifetime-employment culture, a relatively closed labor market and limited use of equity incentives. These factors have contributed to a mismatch between shareholder interests and management incentives, Bernstein says.
Japan is gradually increasing the share of equity-based executive compensation through governance reforms, but the proportion remains well below levels in the United States and Europe. Bernstein highlights that Japanese companies accelerate the granting of equity incentives and require executives to hold more shares to better align management with shareholder value and improve global competitiveness.
Bernstein’s conclusion is that Japan’s extremely low executive compensation is not merely a cultural issue but also a governance shortcoming. The disconnect between management incentives and shareholder interests is constraining Japanese companies’ efforts to improve their global competitiveness.
The note is neutral to moderately positive for large Japanese companies that actively advance governance reforms, because greater use of equity incentives could improve alignment with shareholder value. The market is already somewhat aware of Japan’s governance reforms, but the pace and effectiveness of improvements in compensation structures may not yet be fully reflected in valuations.
Potential catalysts identified in the note include new executive-compensation disclosure requirements from Japanese exchanges and regulators; announcements of changes to equity-incentive plans by major companies; changes in how foreign institutions rate Japanese corporate governance; and validation of the relationship between changes in Japanese companies’ return on equity and executive-compensation structures.