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Article | Executive Pay Memo Asia Pacific

Annual shareholders’ meetings mirror how executive compensation is changing in Japan 

Executive Compensation

By Makiko Konishi , Megumi Niwa and Yuki Sato | July 10, 2019

Japan’s season of annual general shareholders’ meetings has just completed. Every June approximately 300 to 500 companies that end their fiscal year in March seek shareholder approval for executive compensation proposals. 

About half of the proposals address long-term incentive plans (LTI) — variable compensation linked to multiple years' performance and, in most cases, linked with stock price performance. While fairly common in the U.S. and in Europe, LTI only recently became prevalent in Japan.

In this blog post, we'll examine LTI proposals in Japan based on our research of 314 companies that submitted executive compensation shareholder resolutions at their June 2018 annual general shareholders' meetings.

Overview of executive compensation proposals

All listed companies in Japan are required to obtain shareholder approval for executive compensation if it is not prescribed in the articles of incorporation (Companies Act Article 361) unless they have compensation, nominating and audit committees. The Companies Act requires corporations to obtain shareholder approval for the fixed remuneration amount (Clause 1.1), the detailed calculation formula/method of the variable amount (Clause 1.2), and the details of nonmonetary remuneration (Clause 1.3).

Executive compensation among Japanese companies is typically comprised of base salary, short-term incentives (STI), LTI and retirement payments, and under the Companies Act all compensation is required to be approved by shareholders. The most prevalent practice among Japanese companies, confirmed by our research, is to seek shareholder approval for an annual limit on total compensation. Once approved, it is not necessary to obtain another approval as long as the total payout does not exceed the annual limit.

There are some cases where the actual STI payout amount for the fiscal year is proposed in a resolution and companies seek shareholder approval for the amount every year. However, more companies are starting to seek approval for an annual payable limit, rather than to seek annual approval. In fact, we observed several of the companies we researched switch to this approach.

The gap between LTI grants in Japan and the U.S. and Europe is evident from the results of a 2018 LTI survey conducted by Willis Towers Watson and Mori Hamada & Matsumoto, an international law firm. The survey indicated that 81 of the top 100 companies in Japan (ranked by market value) have granted LTIs, compared with over 90% of large listed companies in U.S. and Europe. Among the researched companies, proposed LTI-related resolutions at the general shareholders' meeting increased 15%, compared to the previous year.

However, only a handful of companies we observed still maintain retirement payments programs, and we do not see many related resolutions. When retirement payments are offered, shareholder approval is typically sought to delegate authority to the board of directors to determine individual payment amounts, without disclosing the exact amount in the resolution to shareholders.

LTI proposals

Figure 1 shows the types of LTI plans used by Japanese companies. LTI plans are categorized by whether the value of the award fluctuates with stock price ("equity awards") or just with company financial performance ("non-equity awards"). In this research, all LTI plans proposed are equity awards.

Equity awards can be further divided into two groups: Full value-type awards of shares or stock equivalent, and appreciation only-type awards where payouts are determined based on the growth in share price from the date of grant. A total of 232 companies, or 97% of those offering LTI (Figure 1), proposed "full value-type", while 7 companies (or 3%) proposed "appreciation only-type" awards.

Figure 1: LTI plans used by Japanese companies
1. Equity Awards (239 companies)
  a. Full Value-Type (232 companies)
  • Deeply Discounted Stock Options: 21 companies
  • Stocks (trust scheme): 99 companies
  • Stocks: 112 companies
  b. Appreciation Only-Type (7 companies)
  • Normal Stock Options: 7 companies
Non-Equity Awards (0 company)


Full value-type: Nearly half of companies offering this type of award (112) granted stocks directly, reflecting a significant increase of over 60% compared to the previous year (Figure 2). Direct grants were followed by stocks granted through a trust (99) and grants of deeply discounted stock options (21).

Appreciation only-type: All seven companies granted normal stock options.

Communicate your compensation policies

As equity awards become more prevalent in Japan, stakeholders, including shareholders, will focus on whether companies are granting equity awards, the objectives of these grants and how well the LTI design is likely to support these objectives. And as LTIs become a normal and expected part of Japanese executive compensation packages, it is important to describe their business and HR objectives as they relate to the overwhelming philosophy of executive compensation programs. This will help shareholders to clearly understand the purpose of the LTI.

Last year, only a minority of Japanese companies explained their executive compensation philosophies and detailed their pay programs and plan designs tied to executive compensation-related resolutions. All of those disclosures were voluntary.

This year is different: it is legally required for all listed Japanese companies to disclose details of their executive compensation programs in annual securities reports which are typically filed right after the annual general shareholders' meeting.

In the future, we expect companies will face increasing pressure from shareholders to explain their executive compensation philosophy and the detailed program design through executive compensation-related shareholder resolutions.

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