The antidote for Japan CEO malaise: more pay and even more nerve

[TOKYO] If you want to know why many Japanese chief executive officers fall short as leaders, look no further than how they're paid.

That's the view of Atsushi Saito, who ended an eight-year stint as head of Japan Exchange Group Inc. in June. Japanese CEOs are underpaid, according to Saito. Not only that, most of their salary is fixed regardless of performance, and they won't make bold decisions for fear of missing out on cushy adviser roles after they retire, he says.

The solution: pay them more, link compensation to the share price and part ways when they step down.

"Right now there isn't much attraction to being a CEO," said Mr Saito, 76, who's currently non-executive chairman of private-equity firm KKR Japan, where he works two days a week. "What competent person would do the job?"

The median CEO salary at Japanese companies with revenue of more than 1 trillion yen (S$12 billion) is one-tenth of counterparts in the US, and incentive pay makes up just 14 per cent of the total, against 69 per cent in America, according to advisory company Towers Watson.

Most CEOs in the Nikkei 225 Stock Average get less than 100 million yen a year. While Mr Saito sees the high compensation levels in the US as "sick," he says Japanese businesses should give CEOs at least 200 million yen a year, to encourage more risk-taking and also attract better people.

Japanese equities rallied in 2015 in part because of investors' convictions that Prime Minister Shinzo Abe will help reinvigorate a stagnant economy and business environment. While there are signs the government's push for corporate government practices and higher profits are making an impact, critics including Goldman Sachs Group say the changes don't go far enough.

Adequate compensation is the "missing carrot" in Japanese governance reforms, Goldman said in an October report, citing the low level of incentive pay. The firm argued that Japanese tax laws should be revised to allow more performance-linked pay, while compensation details should be made more transparent. It noted that reforms in Germany after 1998 resulted in a closer linkage between executive compensation and corporate performance.

One of Mr Saito's last acts while running the stock exchange was to design a corporate governance code for Japan Inc. The set of rules that started applying to listed companies in June says management's pay should include incentives to promote "healthy entrepreneurship."

"I want CEOs to have Inamori san or Nagamori san's spirit," says Mr Saito, referring to Kazuo Inamori and Shigenobu Nagamori, the founders of Kyocera Corp and Nidec Corp, both of whom are known for their dynamic management styles. Cushy advisory roles should be abolished, but "whether it's pension plans or stock options, it doesn't matter - CEOs should be paid more."

Current CEO wages are kept low because there's a "tacit understanding" corporate leaders will be kept on the payroll as advisers for many years after they step down. CEOs often think "if I fail, I can't be an adviser and get the lifetime compensation that's my due," says Mr Saito. "A lot of management's based on not wanting to throw that away."

Mr Saito also criticises activist investors who only look at short-term profit, and think that they can be aggressive because of changes in corporate governance.

"They're abusing a system that's based on good will, using it for private, selfish profit," he says. But he notes that their importance is limited. "There are millions of investors in the world, and there are only a handful of activists." While Mr Saito's view on pay aligns with investors including Warren Buffett, he's not advocating compensation at the levels typically given to America's corporate leaders. He says the wealth of the one per cent in the US can't be condoned.

Carlos Ghosn, CEO of Nissan, one of Japan's largest carmakers, has the highest salary among companies on the Nikkei 225, while Masahiko Uotani, head of cosmetics company Shiseido, has the lowest among companies that disclose CEO compensation levels, according to data compiled by Bloomberg. Companies are only required to publish board member wages when pay levels are above 100 million yen.

Not all CEOs are risk-averse journeymen, according to Mr Saito. In addition to Kyocera's Inamori and Nidec's Nagamori, he cites Softbank Group Corp's Masayoshi Son and Fast Retailing Co's Tadashi Yanai as examples of CEOs that are successful entrepreneurs. Softbank shares under Mr Son have soared 14-fold over 18 years, while Fast Retailing has risen nearly 7,000 per cent since it listed in 1997. Both Son and Yanai are among the 50 highest-paid CEOs on the Nikkei 225.

These CEOs are exceptions, Mr Saito says, and it's partly cultural because most Japanese people aren't comfortable with standing out.

"If someone like Steve Jobs was in Japan, how would the Japanese treat him?" Mr Saito said. "If he had joined a large Japanese company, he probably would have been fired immediately."

BLOOMBERG