Care and Feeding of CEOs Part Two : Compensation

Care and Feeding of CEOs Part Two : Compensation

While the remuneration packages for Japanese or locally-hired foreign CEOs are all over the map, there are some basic components and market realities which need to be considered.

Firstly, no matter what the mix, compensation for a CEO should always recognize the person's criticality to the business, and reward the behaviors accordingly. Secondly, those behaviors will be different depending on your company's own personality. For example, in some cases the key behavior will be for the CEO to be a strong administrator, while for others you will want the person to be entrepreneurial.

Let's divide the main types of foreign companies active in Japan, what type of CEO personality they probably need, and that their compensation is likely to be:

I - Small parent, small start-up. Many technology firms entering Japan begin by starting a distributor and OEM network, and their mid-term goal in 5 year's time is to have a marketing, support, and localization operation with little else. All sales typically go through distributors and a reseller network. In this type of company you need a CEO who was probably a sales manager (not previously a CEO) for a competitor and who is a strong team builder. These people thrive on commission and performance-oriented rewards. A base salary of JPY16-20m is adequate, and commissions of around 10% of Net Profit is appropriate. Over time, if you wind up with a 20-30 person company, with sales of JPY1bn+ and net profits of JPY150m+, your CEO will be taking home about JPY25-35m, which is easily enough to keep him/her from wandering.

II - Large parent, small start-up. The larger the parent is, the more likely it is to have natural supporters in Japan already, thus reducing the challenge of setting up a new sales operation. Instead, the emphasis is more likely to be on reducing risk and making sure that the products/services are properly matched to the Japanese market. Large parents also often mean significant bureaucracy and little regular contact between the head office senior managers, other than the VP Asia-Pacific, and the local CEO. Thus in this type of company the CEO should either be someone who has already been a CEO of the local branch of a major firm, or who has substantial experience in working independently but with a high level of reporting and sensitivity to corporate rules. This person is going to be less commission-oriented and will be looking for a competitive package compared to their current firm. Of course the amount depends on the type and size of business and its profitability, but as an indication, the branch CEO of a mid-size semiconductor firm with lots of patented technology will probably be on about JPY25m-JPY35m per year, plus some fixed performance bonus keyed to forecasted (predictable) sales and profits. This bonus can be JPY5m-JPY10m a year.

III - Large parent, existing business in Japan. There are over 5,000 foreign firms in Japan and therefore on-going demand for CEOs to look after them. In companies with more than 100-200 employees and where the firm has a strong brand name, the CEO is probably going to come out of one of the distributors or a famous brand Japanese company in the same industry. Typically these people are Honbucho's or CEOs of competing firms. For such people, a high guaranteed base salary is a status thing and is really important. They will seldom move for less than a 30%-50% premium on their existing salaries - so it behooves you to find out what they are making. In an SME consumer products sector firm, for a 50-year old, you will probably have to pay between JPY25m-JPY40m, plus a 10% bonus.
IV - Financial firms. The salary ranges between Japanese and foreign financial firms are so different that it is unproductive to base your offer on the candidate's previous salary. Instead, you need to look at the market rates in the gaishi sector. If the candidate is good, he/she will be talking to other firms and you will need to compete. I won't put an actual price on the position because I'm aware of Gaishi salaries ranging from JPY25m for a third world bank, through to several billion yen (if bonuses are included) for leading top tier firms. I will say, however, that if you are running an innovative new service or product, and you're hiring someone younger and more aggressive, it is highly likely that you can start off with much lower base, say, JPY20m, then bring them in for substantial bonuses and shares.

Two remaining issues; ESOP and stock allocations, and perks:

For ESOP/shares, where you believe that your company has a chance to either do an IPO or where you are receptive to an earn-out after 5 -10 years, it is a good idea to issue your CEO with stock or stock options. I find that stock options are really only popular in established businesses, whereas actual stock is more appropriate for fresh start-ups. An typical allocation of stock would be 5% -10% of the Japan business, earned over a period of 3-5 years. Other CxO staff may be issued with 1%-2% each.

"Perks" for a CEO can be substantial in larger firms and also for more elite, older individuals, and shouldn't be overlooked in the budget. They can include a car and driver, membership to a number of clubs and golf courses, corporate entertainment budgets, first-class air travel, etc. The CEO will argue that the reason for the perks is to promote the business strategically, and he is probably right. Most deals in the higher brackets do indeed get done on the golf course or over dinner at an exclusive club.