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Business trends

Corporate Japan shifts from stock options to actual stock

Focus on shareholders drives trend in executive compensation

The stock certificates of some Japanese companies before they went paperless in 2009.
The stock certificates of some Japanese companies before they went paperless in 2009.

TOKYO -- Japanese businesses increasingly favor restricted stock over stock options for senior managers, aiming to align incentives with share value over time.

Nomura Securities data shows 794 companies awarding, or planning to award, actual stock as part of executive compensation as of the end of May. This was up 70% on the year and for the first time exceeded the tally for stock options, which came to 600 companies.

The uptrend comes amid growing calls to get managers and shareholders on the same page. "The proportion of management remuneration linked to mid- to long-term results and the balance of cash and stock should be set appropriately," Japan's corporate governance code states.

Businesses are particularly embracing restricted stock, carrying such conditions as not being sold for three to five years. Restricted-stock awards, which effectively became available in Japan in fiscal 2016, are said to encourage running the company with an eye toward improving earnings and the share price in the medium to long term. So restricted-stock enterprises numbered 338 as of the end of May, triple last June's level.

Board benefit trust plans are also growing in popularity. A trust bank uses funds from a company to buy its shares, awarding them to officers and employees. The plan charges a fee but lightens the administrative burden for the company. It also offers flexibility in designing a plan, according to Sumitomo Mitsui Trust Bank.

Stock options offer the right to acquire shares at a preset strike price. Officers can pocket a gain if they acquire shares under an option and then sell them when their price climbs to a certain point. But a decline in stock price does not technically hurt them, leading critics to argue that options tend to encourage riskier management decisions focused on boosting the share price.

With the actual stock, a falling price makes senior management aware of capital losses, the reasoning goes. This is said to encourage balanced decision-making that takes both risk and returns into consideration. Stock options would also lose value if the share price stays weak and holders do not exercise their rights. No such worries apply with the actual stock, except in such special cases as the company going bust.

Nisshinbo Holdings plans to start awarding restricted stock in place of options. Employees have avoided exercising options for such reasons as the limited time frames and complex procedures, and the options "did not make clear contributions in boosting employee motivation," in the words of a company official.

Other big names planning to hand out restricted stock include Oriental Land, Aoki Holdings, Belluna, and Ootoya Holdings.

Citizen Watch is introducing a board benefit trust plan, awarding earnings-linked points to directors and exchanging them for stock when the directors retire. To simplify the tax implications, half of the points earned are exchanged for stock, with the rest paid in cash after income taxes are withheld.

Japanese companies trail their U.S. and European counterparts in stock-based compensation. Restricted stock was available last year at 65% of components of the S&P 500 index ranking in the top 250 by market value, according to Nomura Securities. The proportion in Japan was just 15% of Nikkei Stock Average components.

Similarly, 50% to 70% of CEO compensation at major American or European corporations is stock-based, compared with 20% for their peers in Japan. "If the ratio is too low, it does not give a strong incentive to lift share prices," said Naohiko Abe, managing partner at Pay Governance Japan.

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