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Article | Executive Pay Memo Asia Pacific

Outside director pay landscape in Japan, the U.S. and Europe — 2020 analysis

Executive Compensation
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By Takaaki Kushige , Naoto Ogawa , Yuki Sato and Johnathon Brown | December 8, 2020

This analysis of non-executive director pay is based on publicly available data for 309 companies in Japan, France, Germany, the U.K. and the U.S.

A Willis Towers Watson analysis has found that the typical compensation of outside directors/non-executive directors (NEDs)1 in Japan has remained at a level similar to the prior year at about JPY 15 million for fiscal year 2019. In addition, the proportion of Japanese companies granting stock-based long-term compensation for outside directors/NEDs remains comparable with the prior year at approximately 10%.

With the increasing responsibilities of NEDs, it is crucial that companies begin thinking about the best way to compensate them.

With the increasing responsibilities of outside/non-executive directors, especially as various stakeholders increasingly expect outside directors to contribute to the mission of sustainably achieving mid- to long-term corporate value, it is crucial that companies begin thinking about the best way to compensate visibly outside directors. This includes thinking about the use of long-term incentives (that are not linked to performance) and appropriately differentiating the pay of outside/non-executive directors who take on additional duties, such as being the lead independent director or board chair, in comparison with those who do not hold such positions.

The analysis examined publicly available data for 309 companies in France, Germany, Japan, the U.K. and the U.S. that each had more than JPY 1 trillion in sales revenue (approximately USD 10 billion) in fiscal year 2019. The number of companies included in the analysis range from 23 companies in Germany to 137 companies in the U.S. There are 70 companies in the Japan data sample.

Survey details

Figure 1 compares outside/non-executive director compensation levels across the five countries, while Figure 2 compares the proportion of outside/non-executive directors who receive stock-based compensation. Figure 3 summarises the total compensation paid to outside/non-executive directors serving as board chairs.

Figure 1 below compares outside/non-executive director compensation levels across Japan, France, Germany, the U.K. and the U.S..
Figure 1. Total compensation levels for outside/non-executive directors (those who do not serve as board chairs or senior independent directors) in fiscal year 2019

※Data for Figure 1 was compiled using disclosure of individual compensation. For Japan only, the average compensation per person was calculated using disclosure of the total compensation paid to outside directors and outside officers.

Figure 2 compares the proportion of outside/non-executive directors that receive stock-based compensation across Japan, France, Germany, the U.K. and the U.S..
Figure 2. Percentage of companies that grant stock-based compensation to outside/non-executive directors
summarises the total compensation paid to outside/non-executive directors serving as board chair across Japan, France, Germany, the U.K. and the U.S..
Figure 3. Total compensation paid to outside/non-executive directors who serve as board chairs

About the study

Study data was compiled by Willis Towers Watson’s Global Executive Compensation Analysis team from an analysis of public disclosures. Details of the analysis approach and basis of representation are as follows:

  • U.S.: Data shown is median of companies that are constituents of both the Fortune 500 and S&P 500 with revenue above JPY 1 trillion (137 companies).
  • U.K.: Data shown is median of FTSE 100 companies with revenue above JPY 1 trillion (46 companies).
  • Germany: Data shown is median of DAX constituents with revenue above JPY 1 trillion (23 companies)
  • France: Data shown is median of CAC 40 companies with revenue above JPY 1 trillion (33 companies)
  • Japan: Data shown is median of top 100 companies by market cap and with revenue above ¥1 trillion that had submitted securities reports at the time of analysis (70 companies); for 12 companies that did not disclose outside director pay, data was compiled using disclosure for outside officers (i.e., outside directors and outside corporate auditors).

Currency exchange rates are based on 2019 average TTM rates (USD 1 = JPY 109.05; GBP 1 = JPY 139.26; EUR 1 = JPY 122.07).


Key observations

Takaaki Kushige, Senior Director, Corporate Governance Advisory Group Leader and Executive Compensation Practice Leader, Japan

According to the results of this Willis Towers Watson analysis, the median compensation of outside directors holding a board seat at Japanese companies remains more or less on par with the prior year. Specifically, the median market pay levels for outside directors at large companies which had more than JPY 1 trillion in sales revenue during fiscal year 2019 was approximately JPY 15 million. Furthermore, only about 10% of Japanese companies under analysis granted stock compensation to their outside directors in fiscal year 2019, which is not significantly different from fiscal year 2018.

While the median compensation for outside directors remains largely unchanged year on year, the distribution of compensation has become slightly wider. This is a result of a handful of companies taking the step to increasing pay significantly for their outside directors.

Based on Willis Towers Watson Japan’s advisory experience, it is clear that the role of outside directors has increased considerably over the past few years. As part of their role, outside directors commonly attend six to eight committee meetings a year as members or chairs of compensation and/or nominating committees, and extra roles are set for lead independent directors and board chairs. These responsibilities include engaging with institutional investors and taking a central role in setting board agendas, which significantly add to the commitment required of outside directors compared with what was expected in the past. It is standard practice worldwide to set extra fees for outside directors who take on extra roles (e.g., committee chair, lead independent director); outside/non-executive directors in the U.S. and Europe are compensated at an elevated level aligned with the extra duties and responsibilities that they take on. In this way, the compensation of those who take on extra duties is clearly differentiated from that of those who hold regular board/committee seats. Going forward, it will become essential for Japanese companies to compensate outside directors at levels that are fair and appropriate to the responsibilities they hold, while also improving the objectivity and transparency of disclosure regarding how pay policies were determined.

Now more than ever, outside/non-executive directors are expected to support the sustainable growth of corporate value through their oversight and advisory role. Accordingly, it is reasonable to grant stock-based pay to outside directors to emphsise the thought they should be putting into creating long-term value; however, the independence of outside directors continues to be extremely important in the eyes of institutional investors, and shareholders tend not to favor outside directors and executives sharing the same priorities. As a result, there has been a paradigm shift in the capital market whereby, in the pursuit of creating sustainable corporate value, an increased focus has been placed on the keywords corporate purpose; stakeholder interests; and environmental, social and governance (or ESG).

In the pursuit of creating sustainable corporate value, companies are placing increased focus on corporate purpose, stakeholder interests and ESG.

With these changes, it can be reasonably surmised that the role of the outside director will continue to change going forward. Rather than just being a facilitator between the executive team and company investors, outside directors will be expected to create value in a more collaborative way, bringing a diverse set of experiences, backgrounds and thoughts to the board and sharing perspectives in light of societal common sense. If the diversity of directors becomes just as important as their independence, and all directors whether internal or outsider begin aligning their views in an effort to achieve their common goal of creating shared sustainable value, it may be worth reconsidering granting stock-based compensation to outside directors.


This article is adapted from a Japanese press release dated on August 24, 2020.

Footnote

1 In order to ensure clarity given the slight differences 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.

Authors

Senior Director
Corporate Governance Advisory Group Leader, Executive Compensation Practice Leader, Japan

Senior Consultant,
Executive Compensation, Japan

Lead Associate,
Executive Compensation, Japan

Lead Associate, Executive Compensation, Japan

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