The Determinants of Executive Compensation in Japan and the UK: Agency Hypothesis or Joint Determination Hypothesis?

Although there are many studies on executive compensation, many of these studies often take for granted the 'Anglo-American style of corporate governance'. This paper seeks to contrast the effect of corporate governance on the directors' incentive, by comparing the UK and Japan. There is a positive and significant relationship between directors' pay and employees' average wage in Japan, suggesting that both directors and employees have a similar incentive system while no such relationship is observed in the UK. These results suggest that the difference in corporate governance affects the director's salary and their incentives.Executive Compensation, Corporate Governance, Company performance, Japan, UK

The determinants of executive compensation and its effect on company performance in Japan and the UK

The purpose of this thesis is to analyse directors' incentives in large companies in Japan and the UK, with particular emphasis on the relationship between corporate governance and executive compensation. This thesis seeks to contrast the effect of corporate governance on the determinants of executive pay, by comparing the UK and Japan. Firstly, this research estimates the determinants of executive compensation in Japan. We find a positive relationship between an employee's wage and a director's salary, which is consistent with our hypothesis that both directors and employees are paid in similar ways. In contrast, this research can not find any relationship between shareholders' return and directors' pay in Japan, suggesting that directors have little incentive to pursue shareholders' interest. In contrast, this research finds that top pay in the UK is positively correlated with most company performance variables, including profit, stock market capitalisation and sales, which is consistent with our hypothesis that shareholders in large UK companies have relatively strong powers to control top managers and their compensation through remuneration committees. This research also analyses the effects of company's pay policy on corporate performance. Our analysis on data from the UK shows that there is a positive relationship between `company's pay policy' and firm performance. The company with an annual bonus scheme is more likely to improve company profit and earnings per share, for example. In contrast, there is no relationship between pay-performance sensitivity and firm performance in Japan, showing that the performance-pay sensitivity does not affect company performance in Japan's large companies, or the directors in those companies are not motivated by the change in performance-pay sensitivity

Does Performance Pay De-Motivate, and Does It Matter?

The sheer scale and speed of the shift of payment system from time-based salaries to performance-related pay, PRP, in the British public services provides a unique opportunity to test the effects of incentive pay schemes. This study is based on the first large scale survey designed to measure the effects of performance related pay on a) employee motivation and work behaviour across the British public services; and b) workplace performance. The latter uses an index of organisational performance based on line-manager judgements. While there is evidence of a clear incentive effect for those gaining above average PRP, it is likely that it is offset by a more widespread de-motivating effect arising from difficulties of measuring and evaluating performance fairly. These motivational outcomes are found to affect workplace performance. Organisational commitment appears to offset some of the negative effects of PRP. In contrast to the many studies of top executives, sales and sports personnel, our study examines PRP for large numbers of ordinary employees.performance-related-pay, incentives, performance measurement, organisational commitment, public sector.

Why Does Performance Pay De-Motivate: Financial Incentives versus Perfrormance Appraisal

The sheer scale and speed of the shift of payment system from time-based salaries to performance-related pay, PRP, in the British public services provides a unique opportunity to test the effects of incentive pay schemes. This study is based on the first large scale survey designed to measure the effects of performance related pay on employee motivation and work behaviour across the British public services. While there is evidence of a clear incentive effect for those gaining above average PRP, it is likely that it is offset by a more widespread demotivating effect arising from difficulties of measuring performance fairly. Organisational commitment appears to offset some of the negative effects of PRP.Performance related pay, incentives, performance measurement, organisational commitment, public sector

Executive Pay in Japan: The Role of Bank-Appointed Monitors and the Main Bank Relationship

The tournament model has the feature that executive compensation depends on the wages paid to workers at lower levels of the corporate hierarchy. The agency model shows that compensation based on firm performance is a means by which incentives can be provided to executives once a promotion tournament has been resolved. In this paper, we combine aspects of both models and show that the existence of an outsider who monitors the firm's activities will lower the sensitivity of pay to firm performance for top executives and reduce the importance of tournament-based incentives. Using panel data for 56 Japanese electronics firms, we find support for the notion that bank-appointed Board members help monitor top executives and that tournament considerations are a particularly important feature of executive compensation in Japan.Executive pay, tournaments, agency, monitoring, main bank relationship

CEO compensation and firm performance in Japan: Evidence from new panel data on individual CEO pay

Prior studies on Japanese executive compensation have been constrained by the lack of longitudinal data on individual CEO pay. Using unique 10-year panel data on individual CEO's salary and bonus of Japanese firms from 1986 to 1995, we present the first estimates on the performance sensitivity of Japanese CEO compensation. Specifically we find consistently that Japanese CEO's cash compensation is sensitive to firm performance (especially accounting measures), and that the sensitivity of CEO's cash compensation to ROA is 1.3 to 1.4, which is in general agreement with prior estimates elsewhere. As such, our estimates do not support that Japanese corporate governance is unusually defunct with regard to the significance and size of the sensitivity of CEO compensation to accounting profitability. On the other hand, to be consistent with the literature on Japanese corporate governance that tends to downplay the role of shareholders and stress the role of banks and employees, we find that stock market performance tends to play a less important role in the determination of Japanese CEO compensation. Finally, we find that the bonus system makes CEO compensation more sensitive to firm performance in Japan. The finding is in contrast to the literature on compensation for regular employees in Japan which often argues that bonus is a disguised base wage