Getting to the top of the corporate ladder is a far different journey in Japan than it is in the USA. Japanese firms rarely poach talent from rival firms, outbidding each other for management superstars. Instead, they promote from within, which means the guy (and it's almost always a guy) who gets the top slot has probably worked for decades with the managers around him. A Japanese CEO thinks: "They are my colleagues," says Towers Perrin consultant Naohiko Abe in Tokyo. "It is hard to provide higher compensation to myself."
Unlike the can-do cowboys who often rise to the top of U.S. corporations, "Executives in Japan work more as a team," says Katsuyuki Kubo, a Waseda University economist who studies executive compensation in Japan. "It is often the case that nothing changes when the president changes. It is difficult even for presidents to make a big decision to change corporate policy."
In the USA, compensation packages are at least theoretically designed to line up the interests of the CEO with the interest of the company's shareholders: If they do well, the boss does well — earning tens, even hundreds, of millions of dollars via stock options.
In Japan, Kubo says, the CEO is supposed to take care of shareholders and other stakeholders — employees, suppliers, corporate affiliates, lenders. "It is very difficult to design an incentive scheme for corporate executives if the objective of the firm is not clear," he says.
Whatever the reason, stock options account for only a small part of CEO pay in Japan. The vast majority — nearly two-thirds — comes from base salary, vs. just 12% for U.S. CEOs, according to Towers Perrin. Japanese CEOs have little financial stake in how their company's shares perform. Waseda University's Kubo and Takuji Saito of Kyoto Sangyo University have calculated that an improvement in stock market performance that would earn a typical U.S. CEO $1.8 million would bring a Japanese CEO just $27,000. "Japanese presidents' pay does not change, even when they achieve very good or very bad performance," Kubo says. "In sum, the financial incentives of Japanese presidents have become more like those of bureaucrats."
An aversion to risk
But if the potential rewards are lower for Japanese CEOs, so are the risks. They rarely get fired — as long as they avoid scandal or a catastrophic mistake. Result: Japanese CEOs have little incentive to take risks. "U.S. leaders are more into innovation and creating things," says John Chen, CEO of software maker Sybase. "In the venture world, especially in the Silicon Valley, we look at failure as an opportunity to learn, to get experience. The Japanese look at it as literally failing."
"We all need to have the courage to fail," says Ron DeFeo, CEO of equipment manufacturer Terex.
And despite the gap with the USA, most Japanese CEOs are pampered, too. "The perks are very nice," says Heywood, who runs investment firm Taiyo Pacific Partners. "They have cars, drivers, weekend country retreats, an almost unlimited budget for entertaining — and many of these perks will go with the president once he retires." Japanese CEOs typically spend several lucrative years as company "advisers" once they've left the top job, Abe of Towers Perrin says.
During the boom years of the 1980s, CEO compensation wasn't a big issue in Japan, Abe says. Most big companies enjoyed gains in the stock market. In 1997, the government permitted companies to compensate executives with stock options — previously limited to small venture firms. Dozens of companies did so.
Heywood and Towers Perrin's Abe say Japanese companies will keep moving toward pay-for-performance packages, but CEO pay won't reach U.S. levels.
"As with all things Japan, they will Japanify it," Heywood says. "I believe this is a critical evolution for Japanese companies, because they are also increasingly hiring senior level non-Japanese staff, and the only way to retain them is to offer competitive compensation."