Comparing the Compensation of CEOs in Japan and USA Essay

In the wake of globalization and the radical growth experienced in the corporate world, the compensation of executives turns out to be one of the key factors of consideration. Firms and organizations all over the world have created, analyzed and implemented mechanisms as well as strategies that guide them through in matters of compensating executives. However, it is notable that different nations vary when it comes to the same. In relation to that, a huge difference is seen in the way the United States CEOs are compensated when compared to their likes in Japan. The outstanding difference is triggered and caused by various facets that entail business, economic, corporate formalities, remuneration settings as well as other traits that closely relate to the same. All the factors that create the diverse state of how each country compensates its CEOs, thereby determine whether some receive higher compensation while others do not. The gap in terms of wages, incentives as well as other benefits that U.S and Japan CEOs receive is affected by all pivotal facts linked to the whole subject.

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In the United States, CEOs enjoy a wide range of benefits varying from attractive salaries, comprehensive incentive schemes, performance bonuses as well as stock options. The salary of a CEO in the United States is determined by the kind of industry, salary considerations from the report gathered in the corporate world and the aspect of benchmarking which is competitive(Taft& Singh, 2003). It is a formality in America that the larger the company or the organization, the higher the salary a CEO is paid no matter the performance. In addition, the salary is not centered on other factors that are put into consideration by labor economists like education, age, and experience. On top of the basic salary, comes the annual bonus. Here, the CEOs are compensated on the basis of a company`s performance, the amount of sales made and also personal improvements noted(Taft& Singh, 2003). The weight of each sub-facet determines the amount of bonus to be added. The corporate sector in the United States focuses heavily on compensating executives on equity bases. The use of equity-based consideration in compensation escalated radically in American especially from 2003 all the way to 2008(Fernandes& Murphy, 2012). When compared to other nations like Japan, the United States CEOs are likely to be reluctant in taking risks and this gives a reason as to why they tend to have a compensation based on equity. An added advantage on the form of compensation to U.S CEOs is that they are given a chance to purchase stocks at a much-reduced price for a specific period. This aspect serves a benefiting factor in the compensation circle of a CEO(Fernandes& Murphy, 2012). In addition, U.S CEOs are subjected to favorable incentive plans which include having bonuses received after a set period of time like 3 years, retirement wages, and continuity in the sharing of stocks.

On the other hand, the compensation of Japan CEOs tends to differ from that of the United States. Although the compensation of CEOs in Japan tends to be confidential, researches tend to compare annual salaries as well as estimated benefits to well come up with relatable data and information(Taft& Singh, 2003). Unlike in the United States, CEOs in Japan generally receive a basic salary, an annual bonus, and some added miscellaneous covers. Compared to the United States, where the salary of a CEO is determined mostly by factors like size of the firm, information on what competitors offer, the wages of a CEO in Japan are solely determined by the change in sales, returns on stock and changes derived in earnings. Compensation of executives in Japan is mostly determined by internal factors especially sales growth and changes in earnings. For example, the annual bonuses and the salary are only guaranteed if the sales objectives are hit. Failure to that, compensation decreases in relation to how badly the company has performed(Taft& Singh, 2003). The hopes of having a pay rise may only come true of a firm performance in terms of sales are excellent. Compared to the United States where the poor performance of a company only affects the bonuses, the Japan CEOs are less privileged in that area. In addition, the Japanese also receives other incentives, like acquiring personal loans on behalf of the firm`s name, travel allowances and paid vacancies. However, unlike the United States where such are calculated separately, in Japan, all such expenses are calculated as part of the compensation offered to CEOs. Another sensitive factor is that compensation in Japan is also determined by the stock performance(Taft& Singh, 2003). In other words, the stock performance wholly relies on the efforts of the CEO as an individual on the fact that the same part of the compensation plan. Therefore, if stocks perform poorly, then the compensation is adversely affected unlike in the United States where stock performance only affects the personal decision of stocks to a CEO.

Denoting from all factual findings and concepts in regard to CEO compensation in Japan and in the USA, it is undeniable that those in the USA are well compensated compared to those in Japan. From given research, CEOs in the United States earn approximately 700,000 dollars in a year while CEOs in Japan earn around 200,000 dollars in a year(Taft& Singh, 2003). The huge difference results from the diverse methods and criteria used by each nation when it comes to the same matter. The figures indicate that U.S CEOs earn over almost 4 times of what Japan CEOs earn. The main reason as to why CEOs in America are paid more is because most internal factors like sales growth and firm growth are not the primary determiners of how they should be paid(Taft& Singh, 2003). On the other hand, in Japan, a firm must perform well for a CEO to receive reasonable compensation. Most countries like Germany and also Japan, tend to question the high pay of CEOs in America stating that it is unreasonable(TAKEOand SANO, 2016). Although the pay is good, it is not based on the right concepts. Most CEOs are well paid in America yet they contribute little to the firm's growth. The compensation changes slightly if the firm fails to perform well but the salary is not tampered with(Fernandes& Murphy, 2012). However, such is not the case in Japan as a poor performance of a company may heavily affect the whole compensation package.

Conclusion

In a nutshell, there are various factors that are present which tend to create a difference in how the United States and Japan CEOs are compensated. The remuneration setting of every nation determines whether the compensation is high or low. It is undeniable that CEOs in America are highly compensated considering all the benefits ranging from constant and basic salaries, annual bonuses, performance bonuses, stock option, and incentive plans. Japan CEOs receive low compensation because they only have the basic salary and annual bonuses (which is subject to adjustment in case of poor performance) and the miscellaneous payments. Although it might seem like the United States pays much to CEOs, the compensation is reasonable only that it needs to be based on key concepts like sales growth. On the other hand, Japan CEOs tend to be subjected to low compensation which is not in line with the duties and the responsibilities mandated to them. Japan should consider adjusting the compensation on the higher end so as to be in line with the excellent strategies tied up to the same.

References

Fernandes, N., Ferreira, M. A., Matos, P., & Murphy, K. J. (2012). Are US CEOs paid more? New international evidence. The Review of Financial Studies, 26(2), 323-367.

Taft, D., & Singh, G. (2003). Executive compensation: A comparison of the United States and Japan. Compensation & Benefits Review, 35(3), 68-78.

TAKEO, Y. and SANO, N. (2016). Japan's CEOs: underpaid and underwhelming | The Japan Times. [online] The Japan Times. Available at: https://www.japantimes.co.jp/news/2016/01/06/business/japans-ceos-underpaid-underwhelming/ [Accessed 25 Jul. 2018].