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Nissan's Ghosn crisis

Ghosn's case highlights Japan's sensitivities on executive pay

Japanese managers earn 10% as much as American peers

The CEOs of Broadcom, CBS and TripAdvisor earned about $103 million, $68 million and $43 million last year, far outpacing their Japanese peers.   © AP

TOKYO -- Despite the outcry over the hefty compensation received by ex-Chairman Carlos Ghosn from Nissan Motor, Japanese executives typically earn only a tenth of what their peers in the U.S. make, raising concern in some quarters that corporate Japan may lose out to global rivals in its quest for talent.

In addition to bringing Japanese compensation into line with international standards, injecting transparency into decision-making regarding executive pay will be crucial.

Previously released documents show Ghosn earning roughly 1.9 billion yen ($16.7 million) combined in fiscal 2017. Nissan supplied 735 million yen, or about 40% of the automaker's executive compensation. The rest of Ghosn's came from alliance partners Renault and Mitsubishi Motors.

With allegations of undisclosed deferred compensation and other perks, such as properties in Brazil and Lebanon purchased by a subsidiary, Ghosn's total compensation from Nissan may run much higher.

Even so, his pay is not extraordinary from a global perspective. In America, the CEOs of Broadcom, CBS and TripAdvisor earned about $103 million, $68 million and $43 million last year.

The head of General Motors earned about $21.9 million, while's Ford Motor's chief received approximately $16.7 million. In France, where socialist currents run stronger than in the U.S., the CEOs of L'Oreal and pharmaceutical multinational Sanofi earn the equivalent of roughly $10 million.

Executives at large Japanese corporations earned the equivalent of about $1.3 million on average in fiscal 2017, according to global consultancy Willis Towers Watson. This sorely undershoots the American equivalent of around $12.3 million. Japanese executive compensation is only 20% to 30% of levels in Germany, France and the U.K.

Wealth gaps are frowned upon in Japan, where nearly the entire population once claimed middle-class status. Many executives still decline excessively high compensation. Since compensation of 100 million yen or more must be disclosed, many keep it around 99.9 million yen. The ratio of incentive compensation linked to earnings or stock prices is also low compared with elsewhere.

As a result, Japan's executive pay has faced upward resistance. Such compensation totaled roughly 880 billion yen in fiscal 2017, up 31% from fiscal 2010. But it did not grow as much as earnings, so the ratio of executive pay to net profit declined to 1.95% from 4%.

Looking at individual companies, the relationship between earnings and compensation is unclear. Tokyo Shoko Research calculated compensation per board member at the top 100 enterprises and checked the correlation with market capitalization, which tends to reflect earnings. That study shows 20% of companies reported strong earnings growth but awarded relatively little compensation. On the other hand, nearly 20% reported slow growth but doled out generous compensation.

Though Nissan's market cap grew a relatively modest 3%, its official executive pay exceeded the average at about 207 million yen. If Ghosn did indeed underreport his compensation, the automaker would be cemented even more firmly in the camp of companies with low growth but high pay.

How Japanese companies decide executive pay has been criticized as opaque. In many cases, the gross amount requires approval at a general shareholders meeting, but the company president has sole discretion over how to allocate the sum. But with pay stuck at historically low levels, there has been little in the way of calls for deep debate.

In the U.S., a listed company must have a compensation committee of independent directors to bring an objective view to setting individual executives' pay. Just 26% of listed companies in Japan -- 932, among them Hitachi and Bridgestone -- have set up compensation committees. Nissan lacks such a committee, and Ghosn was seen to have approved his own pay in his favor.

"A transparent compensation system that adds pressure [on executives] is the wellspring of competitive power," says Kunio Ito, an adjunct professor in the Graduate School of Business Administration at Hitotsubashi University.

For Japanese businesses to attract managerial talent, including from overseas, the country's executive pay must reach levels commensurate with Europe and the U.S. Increasing transparency by using compensation committees would make it easier to win the understanding of concerned parties, marking a first step in that effort.

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