A Willis Towers Watson analysis has found that the compensation of outside directors/non-executive directors* in Japan is similar to, or even exceeds, that of non-executive directors in some European countries. For instance, the median compensation for outside directors in fiscal year 2018 was 14.3 million yen in both the U.K and Japan and ¥9.4 million in France. Disclosure of compensation for outside directors in Japan remains limited, while detailed disclosure of compensation policies for outside/non-executive directors in France, Germany, the U.K. and the U.S. is extensive.
As the compensation of outside directors serve as a fundamental aspect of corporate governance, it is essential for Japanese companies to improve disclosure of compensation policies.
As the compensation of outside directors serves as a fundamental aspect of corporate governance, it is essential for Japanese companies to improve disclosure of compensation policies, including those for outside directors, and to ensure directors are being compensated appropriately in light of their roles, responsibilities and functions.
The analysis undertaken examined publicly available data for 321 companies in France, Germany, Japan, the U.K. and the U.S., which each had more than ¥ 1 trillion in sales revenue in fiscal year 2018. The number of companies included in the analysis ranges from 25 companies in Germany to 135 companies in the U.S.. There are 77 companies in the Japan data sample.
*In order to cover the slight difference in terminology among the five countries, the term ‘outside/non-executive director’ will be used in this article. While the term ’outside director’ is common in Japan and the U.S., the term ’non-executive director’ is more commonly used in European countries.
Takaaki Kushige, Senior Director, Corporate Governance Advisory Group Leader and Executive Compensation Practice Leader, Japan
Figure 1, which presents overall pay levels by country, reveals a surprising degree of uniformity in compensation levels for outside/non-executive directors of very large companies in the countries examined. In contrast to the strong differences in pay levels of executives compared to Japanese executives (please refer to the Willis Towers Watson release dated August 2, 2019: CEO Pay Landscape in Japan, The U.S., and Europe — 2019 Analysis), the compensation paid to outside directors in Japan is already similar to the levels paid in some European countries.
As shown in Figure 2, the payment of stock-based compensation to outside directors in the U.S. is common, with nearly all companies within this analysis granting stock-based compensation to outside directors. However, cases of stock-based compensation granted to non-executive directors in Europe remain limited. The difference in market practices reflects a desire in the U.S. to create long-term alignment between outside directors and shareholders, and a European desire to avoid all incentives in outside director pay structures.
A handful of Japanese companies are slowly introducing stock-based compensation plans with outside directors as participants.
While it cannot yet be said to be conventional, a handful of Japanese companies are slowly introducing stock-based compensation plans with outside directors as participants.
In France, Germany, the U.K. and the U.S., the compensation of outside/non-executive directors is, without exception, disclosed on an individual basis. It is also standard practice to disclose as part of its compensation policies the mechanisms by which a company determined the total compensation to be paid to its outside/non-executive directors, and the additional fees paid to directors with additional responsibilities, such as board chair, senior independent director and committee chairs. Granting additional pay to outside/non-executive directors with additional duties allows each recipient to be appropriately compensated in accordance with their role and time commitment. It is particularly clear that board chairs are compensated at a higher level than other outside/non-executive directors (Figure 3). The practices of Japanese companies in this regard is not clear, as the only directors in Japan whose individual compensation is disclosed are those earning ¥100 million or higher per year; as a result, the compensation of individual outside directors in Japan is seldom disclosed.
The compensation of outside/non-executive directors serves as a foundational aspect of corporate governance.
Shareholders and other stakeholders should directly monitor the compensation of each company’s outside directors, and company disclosure should accordingly have an appropriate level of objectivity and transparency.
The compensation of outside/non-executive directors serves as a foundational aspect of corporate governance. As such, shareholders and other stakeholders should directly monitor the compensation of each company’s outside directors, and company disclosure should accordingly have an appropriate level of objectivity and transparency. Since there is little disparity in the expectations of the role of outside/non-executive directors worldwide, if Japanese companies do not adopt the same level of disclosure seen overseas, it is likely to impact confidence in corporate governance practices. Simultaneously, for outside/non-executive directors who hold particularly important roles such as a board chair or a committee chair, it is important that they are appropriately compensated to reflect their greater responsibility and increased workload. Current discussions around improved company disclosures to enhance objectivity and transparency are intended to solve the above-mentioned matters.
*This article is adapted from a Japanese language press release dated August 15, 2019.
1Study results are based on an analysis of public disclosures, detailed as follows:
U.K.：Median of FTSE 100 companies with revenue above ¥1 trillion (49 companies)
Germany：Median of DAX constituents with revenue above ¥1 trillion (25 companies)
France：Median of CAC 40 companies with revenue above ¥1 trillion (33 companies)
Japan：Median of top 100 companies by market cap with revenue above ¥1 trillion (77 companies). For 28 companies which did not disclose outside directors pay, data was compiled using disclosure for outside officers (i.e. outside directors and outside corporate auditors).
U.S.：Median of companies that are constituents of both the Fortune 500 and S&P 500 with revenue above ¥1 trillion (137 companies).
Compensation market data was calculated on a per person basis for each company and aggregated as 1 sample per company. Currency exchange rates are based on average rates in 2018 (1 USD = 110.43 JPY, 1 GBP = 147.48 JPY, 1 EUR = 130.42 JPY)
