TT-570 -- How Much CEO Salary is Too Much? E-biz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, June 20, 2010 Issue No. 570


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- News
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A change in the corporate governance law implemented at the
end of March has caused some feathers to fly here in Tokyo,
as companies start to reveal how much their CEOs and other
top executives are getting paid. The law change was part of
a new regulatory initiative by the Financial Services
Agency (FSA), which wants better transparency over how
companies compensate their management and directors.

Until now, companies just had to report what their
directors compensation as a group -- and since they typically
have a lot of directors, this hasn't been a very useful guide to
what the top dogs are making. Up until 2005, researchers
and investors could always look at the personal income tax
list, as the Tax Office used to publish who the top tax
payers were every year. But with the demise of that system,
until now there has been no way to find out this kind of

Per the new rules, basically companies who pay their
executives more than JPY100m now have to declare that fact
when they do their annual reporting. So far, Sony has said
that its CEO, Howard Stringer, made JPY400m plus stock
options last year, and Toyota, Nissan, and other firms are
due to report their top executive pay levels later this
month. It will be interesting to see what they say.

[Continued below...]

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[...Article continues]

One company that has had a lot more than its share of
fall-out is Shinsei bank, where at least 5 executives are
earning more than JPY100m each, including the top four
foreigners. The company has been told by the FSA that it
needs to restructure its compensation arrangements to
better match the poor financial record of the bank over the
last two years. Apparently the bank has lost a massive
JPY283bn since 2008, and earlier this year had to cancel
a merger with Aozora after Aozora baulked over Shinsei's
low capital reserves.

Separate to the disclosure rule, the FSA has another rule
just for those banks who have accepted government
bail-out funds. According to that rule, the bank has to hit
at least 70% of its business plan for two years in a row,
or suffer the replacement of its CEO and a reduction in
salaries of the senior executives. Shinsei still owes the
government JPY216.9bn in bail-out loans and it looks like
Financial Services Minister Jimi is going to take them to
task over it.

There really isn't any information as yet on how much the
average CEO in a Japanese company makes, unlike the USA
where listed companies at least do give this kind of
detailed information. The Keidanren, which represents
mainly large corporations is dead against the idea of
giving out salary information, however, we believe it to be
a good idea -- especially for those companies which are not
doing so well and yet continue to pay out large sums to
their captains.

We searched the web to find a recent study on Japanese
versus U.S. compensation, to see whether or not these sums
being paid to Stringer and the Shinsei execs is
unreasonable or not, especially since both of these firms
are losing money hand over fist. In doing that, we came
across an excellent 2006 study, at, from researchers at Todai,
Harvard, and Kelley.

The authors of this study had the advantage that they could
still review the old Tax Office lists, and so were able to
draw up a topology of what executives at various companies
were making, then do a simple comparison with U.S.
published figures. In essence, they conclude that Japanese
executives are paid 9-10 times LESS than their U.S.
colleagues, and that even the highest paid executive in
Japan in 2004, Tadashi Yanai of Fast Retailing, took home
US$30m, compared to the top U.S. CEO, Reuben Mark of
Colgate-Palmolive, who took home US$147.9m (much of it in
options). Needless to say, Yanai is also founder of his
company, so would have been able to make much more
than this if he felt like it.

Further down the totem pole, in 2004 only 20 Japanese
executives made more than US$6m, whereas 211 U.S.
executives did. Among the top 100 TSE-listed non-bank firms
in Japan, the average top executive pay was about
US$610,000 (about JPY65m back then) and amongst all TSE-1
firms the average was US$420,000 (about JPY45m), or about
8-9 times the average employee salary. This seems quite
modest compared to U.S. CEO salaries, which in 2007 for S&P
500 CEOs averaged US$10.5m, about 344 times the salary of
an average worker. Perhaps it should be noted that this is
less than the 525 times pay U.S. executives used to earn during
the go-go years of 2000.

So why is the FSA introducing this level of transparency now?
Perhaps we can call it the "Shinsei Law"? In that it seems
to provide perfect timing for them to act on the top Shinsei
foreign directors without having to worry about the
personal privacy law. Or perhaps the intent is more broad
brush stroke in nature, and is part of an overall program to
warn companies to keep executive pay down when the
government goes ahead to slash corporate taxes most likely
later this year.

If this is the reason, it's a good one. The average salary
of corporate employees is still dropping, and restraining
the top tier executives will create more political
stability than if their salaries keep going up. In that scenario,
the media would be sure to start hammering on tte DPJ
for creating a widening of social classes within Japan. This is
of course the same socialist refrain that directed at the
Koizumi legacy, whether or not it actually has any merit.

So will restraint of executive pay mean that talented
individuals like Carlos Ghosn will shy away from Japan? Not
necessarily. Foreigners still only get taxed on their local
income for the first 5 years of residence, so if a Sony or
a Nissan want to bring someone in from outside, they can
simply employ them in two positions -- continuing their old
one with taxes being paid in that jurisdiction, and their
new one, with taxes paid in Japan.

For Japanese CEOs it might act as a bit of a crimp, but as
we all know, Japanese CEOs get so many perks from the job
that they're not really wanting for anything anyway. There
isn't much that they need to spend their money on. And for
the really top guys, well, they are either founders or
members of the founding family, and as such, lower salaries
mean higher profits and therefore more stock value. If they
really need some extra spending money, they can just simply
sell some of their shares through their family holding


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+++ NEWS

- Salarymen cut back on eating out
- KKR agrees its first buy-out deal in Japan
- Joint crude oil storage agreements
- NTT Data buys India's Intelligroup
- Seiyu debuts JPY380/bottle wine

-> Salarymen cut back on eating out

A Shinsei Bank consumer survey has found that because
monthly salaries shrank by an average 3.3% last year,
salarymen are spending less than ever going out drinking
for work and/or stress release. Apparently wives of the
1,000 salarymen polled gave their husbands just JPY40,600
a month, 11% less than last year, to spend on eating and
drinking outside the home. As a result, the average
salaryman now spends just JPY500 on lunch daily, and
JPY4,190 in the evenings (approximately twice a week) at
izekaya and other drinking establishments. (Source: TT
commentary from, Jun 11, 2010)

-> KKR agrees its first buy-out deal in Japan

U.S. Private Equity giant Kohlberg Kravis Roberts (KKR) has
been in Japan for some time, but only just this month came
up with its first buy-out deal, arranging for the purchase
of a recruiting firm called Intelligence, from cable
carrier company Usen. This is the largest private equity
deal in Japan so far this year, and KKR is reportedly
paying JPY32.5bn for the operation. ***Ed: As with other
international deals involving Japan, this seems a very high
price to us -- especially considering that Intelligence had
net profits of just JPY513m in FY2009 ending March this
year. Still, they apparently had profits of JPY6.1bn two
years ago, so one assumes that KKR is buying on the
expectation of a labor market recovery in 2011 or 2012.**
(Source: TT commentary from, Jun 19, 2010)

-> Joint crude oil storage agreements

Japan has signed two interesting and far-reaching crude oil
storage agreements recently: one this month with Saudi
Arabia, for the storage of 3.78m barrels in Japan, and
another back in November last year with Abu Dhabi for the
storage of 3.6m barrels. The storage will be in Okinawa,
and will be part of the nation's strategic reserve. ***Ed:
Back in 2006 we pointed out that Japan uses about 3m
barrels of crude oil a day, so these two agreements amount
to around 2.5 days of extra supply in case of war or other
disruptions in the Mid-East. Currently Japan maintains a
strategic reserve of 90 days.** (TT commentary from, Jun 15, 2010)

-> NTT Data buys India's Intelligroup

For a relatively conservative company, NTT Data has just
gone and done a radical thing by buying out one of India's
mid-tier IT companies. NTT Data will pay around US$199m for
Hyderabad based Intelligroup, a 21.1% premium over the
company's OTC share price on the close of the day before
the announcement. NTT is reportedly interested in
Intelligroup's U.S. and India businesses, which amount to
around US$125m annually. ***Ed: Regardless of the not so
big premium to the stock price, this still seems like a very
high overall price to us. They are paying almost 70% over
the sales amount for last year, let alone a multiple of the
EBIT, which is the normal measure. Here in Japan,
profitable IT companies typically sell for 1.5-3x EBIT, or
roughly about 30% of sales.** (Source: TT commentary from, Jun 14, 2010)

-> Seiyu debuts JPY380/bottle wine

Seiyu GK, aka Walmart Japan, has announced that it will
start selling Oak Leaf red and white wines for just JPY380
per 750ml bottle. This will make the wine the lowest cost
product now available nationwide through GMS stores and
supermarkets. The product is of course sourced from
Walmart in the USA. ***Ed: As with the JPY4,900 men's two
piece suit, we wonder if Don Quijote will release a JPY350
bottle of Chinese plonk, just to take the record of being
cheapest?! We checked out a Donki MEGA store today and
could only find wine priced at JPY780 or above. Deflation is
still very much at work here in Japan.** (Source: TT
commentary from, Jun 18, 2010)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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Remuneration depends on your experience and level


- Vendor Business Mgr, Global IT Supplier, JPY8m – JPY10m
- eSourcing Account Manager, JPY4.5m – JPY5.5m
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