Last year, Sen. Chuck Grassley (R-IA) responded to news that AIG executives — who were bailed out with tens of billions of dollars from American taxpayers — were due to receive $165 million in bonuses by saying that they should “follow the Japanese example and come before the American people and take that deep bow and say I’m sorry and then either do one of two things: resign or go commit suicide.”
While committing ritual suicide is a rather extreme “example” to be learned from Japanese society, a more appropriate lesson is how the Japanese structure their pay incentives for corporate executives. Last week, Japanese securities regulators began “requiring Japanese companies to disclose pay for executives making more than 100 million yen ($1.1 million).” BusinessWeek reports that the disclosures reveal that the average compensation of a Japanese CEO is less than one-sixth that of their American counterpart and 16 times more than the average Japanese worker:
Japan is the land of the bargain-basement CEO. On June 30 securities regulators began requiring Japanese companies to disclose pay for executives making more than 100 million yen ($1.1 million). While the headlines went to the top earners — foreigners Carlos Ghosn of Nissan Motor (NSANY) and Sony’s (SNE) Howard Stringer — the big surprise was how few Japanese business leaders take home super-size paychecks.
Although pay for Japanese executives has more than doubled in the past decade, the government says, fewer than 300 people at Japan’s 3,813 public companies earned enough in 2009 to require disclosure, according to PricewaterhouseCoopers. Companies listed on Japan’s stock exchanges paid their chief executives an average of $580,000 in salary and other compensation last fiscal year, PWC estimates, about 16 times more than the typical Japanese worker. Average CEO pay at the 3,000 largest U.S. companies is $3.5 million, including stock options and bonuses, according to the Corporate Library, a research group.
While Japan maintains a relatively low CEO-to-worker pay ratio, the average American CEO now earns 319 times as much as the average American worker. Conservatives often argue that the high level of compensation American executives receive is due to a high level of performance, but this often isn’t the case. For example, Japan-based Nintendo’s CEO Satoru Iwata, who runs the world’s most successful gaming company, received an annual salary last year of only $2.1 million. Meanwhile, U.S.-based Activision CEO Bobby Kotick, took in a $3.1 million salary and $40 million more in stock options, despite running a company with only a fraction of Nintendo’s earnings.
In fact, a study released late last year by researchers Raghavendra Rau and Huseyin Gulen of Purdue University and Michael J. Cooper of the University of Utah that surveyed the performance of 1,500 companies between 1994 and 2006 found that “lavish CEO compensation may in fact undermine shareholder wealth.” The researchers concluded that “the 10 percent of companies with the most highly paid CEOs earned unusually low returns in both the near- and long-term.”
As, “Yukio Sakamoto, CEO of Elpida Memory, Japan’s largest semiconductor maker, whose pay was under the reporting threshold” told BusinessWeek, “My house is small, but I’m happy. I commute by train every day and have never had a problem.” Considering Grassley’s strong words last year, is he willing follow the “Japanese example” by considering legislation that would promote reining in excess executive compensation in the United States?