Executive Director Compensation

Executive Director Compensation

Recently the Nikkei newspaper announced its annual compensation details for directors of 100 Japanese public companies. The amount being paid, mainly to executive (employed at the company) directors was JPY32 million (US$290,000) per year, not an insignificant amount but certainly lower than many other countries for similarly sized listed firms. According to the Nikkei, the highest director payouts were at Nissan Motor, with an average of JPY200 million – much of which was probably well deserved.

Although this was a director survey, add no more than another 30% on to the JPY32 million, and you would have approximately the average salary for Japanese public company CEOs (said to be between US$300,000 and US$500,000) – giving CEOs approximately 5-8 times the salary of their employee average. In comparison, the average salary for US CEOs of the top 100 public companies is about JPY330,000,000 (US$3 million), approximately 56 times the salary of their rank and file employees.

Does this mean that Japanese management are the world's most successful socialists? In a sense, yes, since it is true that these people are clearly leaving more profits inside the company.

However, you need to consider the many benefits that these people enjoy at the expense of their companies. The benefits range from seldom having to buy a meal, to chauffered cars, to company-paid housing, to some of the world's cheapest mid-quality health care, company-paid overseas travel, etc. Indeed, there are very few physical needs that aren’t supported by leading companies to their top executives.

And of course, until recently, the company stock was closely held, thus executives were pretty much guaranteed jobs for life. If they didn't make a profit, they certainly weren't (and to a large extent still won't) going to be fired for it.

In addition, at retirement there is a lump sum payment, which for many executives can top “ichi oku en” ($1,000,000). And post-retirement, there is always the popular “Komon” (Advisor) position at the firm, providing input of often questionable value for a regular salary.

There is of course a rational reason why capitalists would engage in such socialist behavior, and that is tax. Back in the post-war era, and particularly in the mid-80's, the top personal tax rate was 88%. With a rate like that, it was no wonder that executives decided to move many of their personal expenses to their companies. Luckily the Japanese tax system allowed the transfer – taking the view that executives need to have a certain lifestyle in order to provide credibility about their company and to meet potential customers. Nowadays, the effective top income tax rate is 52%, but if you include both national and ward taxes, and social security, the actual amount is more like 67%, still high enough to encourage such behavior.

By-the-way, the same survey, and remember, this is only 3% of Japan's biggest companies, found that the average employee salary was about JPY8 million per year. The nation's overall average income level for 2003 was about JPY4.53 million.

Lastly, non-executive directors in Japanese public companies are surprisingly not so well paid, where I believe many get as little as JPY2-3 million per year, though this greatly depends on the company. In comparison the average non-executive director positions in the USA for leading firms is around $112,000 – perhaps in part because they now have the added liabilities imposed by the Sarbanes Oxley law.

Terrie Lloyd is the founder of DaiJob, Inc. He also writes a weekly newsletter for entrepreneurs and business people about business and political opportunities in Japan. You can find the newsletter at www.terrie.com. For further contact with Terrie, email him at terrie.lloyd@daijob.com.

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