Compensation and Performance : The Case of Japanese Managers and Directors

We investigate empirically the nature of Japanese executives' compensation contract. The principal issues examined are: the extent Japanese executives are rewarded for performance both in the short term and in the long term, the role of alternative governance and control mechanisms unique to Japanese firms such as cross-shareholdings, main banks, etc., on the design or the executive compensation contract, and the importance of non-share value related goals in compensation. Our results indicate that compared to US executives, only a relatively small percentage of the group of Japanese executives/directors receives increased compensation from short term share increases. In the long term, the reward to share performance is more prominent, thus providing some indication of the existence of implicit contracts to pursue long term share value maximization goals. Bonuses, on the other hard, are more related to short term performance, and their importance diminishes in the long term. This feature of compensation contracts would also seem reasonable given the transitory nature of a sizable component of short term performance. However, some surprising results are: (1) The dominant role of sales maximization in setting executive contracts, even in the long term. (2) The highly asymmetric nature of the Japanese executive compensation, where increased compensation is given both in years when the firm's market value increases (or decreases but sales increase.) (3) There is evidence of less compensation and market value alignment in more recent years when the stock market in general was declining