Compensation for CEOs has come under intense scrutiny in recent years in the United States, as executive incentives have helped balloon salaries by more than 1,000% over the past 40 years.
This is nearly 100 times the rate of average workers, according to data from the Economic Policy Institute, which found that CEO compensation has grown 940% since 1978 while a typical worker’s compensation has risen only 12% during that time.
While increased awareness and a call-for-action to slow this widening CEO pay ratio gap in the U.S. has yielded some positive results of late — including many executives forfeiting their 2020 salary to continue employing and compensating their workforce during the pandemic — recent data from Willis Towers Watson reveals a widening gap in Japan.
The analysis of CEO compensation for 429 companies in Japan, France, Germany, the United Kingdom and U.S. found a significant increase in total compensation paid to CEOs in Japan — a 20.5% increase in fiscal year 2019 compared with 2018 — which was driven by a significant expansion of long-term incentives (LTIs). While Japanese CEOs continue to be compensated at notably lower levels than top executives in the U.S. and Europe, the structure of compensation plans in Japan, which in fiscal year 2019 was composed of 29% LTIs (up from 21% in fiscal year 2018), are starting to mirror those of European companies that place a heavy emphasis on performance-linked pay, the analysis found.
This shift toward using incentive-based pay could mark a major turn in Japanese compensation practices when compared with practices that were common in 2015 when the Japanese Corporate Governance Code was first introduced.
“The higher total compensation of Japanese CEOs in fiscal year 2019 is largely due to the increasing use of performance-based compensation and stock-based LTI plans,” observed Sumio Morita, senior director, head of rewards business in Japan at Willis Towers Watson. “LTIs have become more commonplace in Japan over the past few years and the upward trend observed in this analysis is due to the expanded weight of LTIs within executive pay packages. In addition, higher annual incentive (bonus) payouts have also played a part in the increased level of total compensation for top executives in Japan.”
Morita noted that while the compensation of the Japanese CEO has been on an upward trajectory in recent years, CEO pay in the U.S. and Europe has remained relatively stagnant. Pay levels in fiscal year 2019 for CEOs at U.S. and German companies remained on par with the prior year and total pay of French CEOs increased a mere 2.3%. The exception was the UK, where CEO compensation was 6.9% higher in fiscal year 2019 when compared with the prior fiscal year. While there was a clear distinction in the growth of CEO pay in Japan compared with the U.S. and Europe, the trend of U.S. and European companies paying their CEOs significantly higher amounts in total compensation than in Japan remains unchanged.
LTIs now account for 29% of the total compensation paid to the top executives of Japanese companies (21% in fiscal year 2018). In terms of the overall pay mix and the proportion of pay that makes up performance-linked compensation, Japanese companies are inching toward similar structures adopted by European companies. This trend is a result of larger Japanese companies successfully achieving goals set out in the Japanese Corporate Governance Code, including tying pay with performance and increasing the focus placed on equity compensation.
The Willis Towers Watson analysis found that the number of Japanese companies paying especially high levels of compensation continues to increase with 18 of the companies under analysis compensating their CEOs with at least JPY 300 million in fiscal year 2019 (15 companies in fiscal year 2018). Furthermore, 13 companies paid their top executive more than JPY 400 million in fiscal year 2019 (as compared with 11 companies in fiscal year 2018), reflecting the increasing number of companies paying their CEOs at levels more comparable with their European counterparts.
About the Author
Brett Christie is the managing editor of Workspan Daily.