The rise of equity-based executive compensation in Japan
Use of shares for compensation by Japanese companies is becoming an important feature of the corporate landscape and post-merger integration. John Meehan and Rikako Bocchietti of Global Shares explain what is happening. With a distinctive branding of four coloured shapes, Global Shares is at the forefront of equity compensation developments offering a full local support service to Japanese companies. Gideon Franklin is listed on the About us section of the Global Shares website as one of the trusted partners.
Japanese companies are changing the way they pay their executives. Traditionally Japanese companies have focused their reward policies on cash compensation. However, a mix of corporate governance and global market pressures is forcing companies to change from pure cash compensation to a combination of cash and shares, consistent with their Western counterparts. Japanese companies are starting to realise the benefits of having employees as shareholders, which include incentivising performance and alignment with investors. Importantly for global companies, equity incentives can act as a kind of corporate glue in helping international employees identify with the parent companies’ goals and values.
So why the change? There are several reasons for this:
1. Changes to the Corporate Governance Code. There has been consistent pressure, particularly from foreign investors, for corporate Japan to improve its governance to attract more foreign investors. In 2014, under the Shinzo Abe administration, Japan launched a number of reforms to bridge the gap in global competitiveness and improve corporate governance standards. Specifically, the Abe administration launched a programme of reforms under the banner of the “Japan Revitalization Strategy Revision 2014”, the “JAPAN is BACK” growth strategy. The reforms were part of Shinzo Abe’s 3 Arrows strategy with the objectives of strengthening corporate governance,and restoring Japan’s earning ability worldwide. As part of the strategy, the government decided it wanted to introduce a performance-based equity compensation culture. This was to assist with the transformation from a focus on misconduct prevention, deemed to be prevalent in Japanese companies, to a focus on the need to create value. In 2015 changes to the Corporate Governance Code were introduced, encouraging companies to incentivise executives using equity as well as cash.
2. Changes to the taxation of equity incentives. In 2017, the tax restrictions that had been obstructing the introduction of equity compensation were eased. The main result was that performance-based shares or Restricted Stock Units (RSUs) could be treated as a deductible expense.
3. Increased Mergers & Acquisitions (M&A). Driven by a shrinking domestic market due to the aging population, Japan Inc is becoming more and more acquisitive outside of Japan. Many of the target companies, particularly in the US and Europe, have existing stock plans in place and there is an expectation that the employees are offered similar benefits by the acquiring company. More enlightened Japanese companies also see the use of equity compensation as an excellent way to quickly integrate new employees into the parent company and see this as a useful tool to provide alignment with corporate goals, values and culture.
4. The implementation of global equity incentives has been greatly simplified. Global service providers, including our organisation, Global Shares, are now acting as catalysts for change and have removed many of the perceived legal, compliance, technological and regulatory barriers to offering shares to employees around the world. We have introduced sophisticated software to help companies overcome cross-border administrative challenges and provide multi-lingual, multi-currency online access to help employees understand what their equity incentives mean. We have also developed a special purpose employee share account structure to make it easy for employees around the world to hold and trade Japanese securities online.
Since the corporate governance and tax changes have been introduced c. 600 listed companies have now introduced or received shareholder approval to introduce Restricted Stock Plans. If we include other types of incentive plan such as stock options, the number of companies with an incentive plan is now c. 1500. Notable examples of companies introducing global equity incentive plans include Fujitsu, Shiseido and Mercari. However, whilst the number of companies is significant, Japanese companies are still being very conservative in their approach to the use of equity as a compensation tool and, in many cases, this is only offered to very senior executives. The main exceptions to this are where equity is used for M&A purposes or in the technology sector where more companies are forced to use stock to attract talent and remain competitive. Mercari is a good example of this as in 2018 they launched a Restricted Stock plan to all 1,000 of their employees as part of their drive to become a global tech company.
So what does the future hold? We expect to see an increasing number of companies adopt equity incentive plans. We also expect to see equity incentives offered further down organisations and not just limited to senior executives. Finally, as these equity incentives become more mainstream in Japan we are looking forward to seeing corporate Japan refine equity incentives and, perhaps, one day become leader in the way equity incentives are delivered to employees. Whilst no one can predict the future, one thing is for sure, the rise in equity incentives in Japan is set to continue.
CEO Global Shares Japan
John has over 20 years’ experience in equity compensation. He has detailed knowledge of all aspects of global stock plan services and executive share-dealing management. Since 2018, John has been focused on developing the Japanese market for equity incentives. Before starting his career in equity compensation, John spent 3 years in Japan working as a teacher and has a strong affection for the country, its people and its culture. John joined Global Shares in 2015, prior to which he worked for Morgan Stanley as Head of Client Management.
Business Development Executive
Rikako joined Global Shares in 2018 and has contributed to the successful launch of the Japanese division. She has recently completed the Institute of Chartered Secretaries and Administrators Certificate in Employee Share Plans (Cert. ICSA). She is now responsible for the development of the market for European subsidiaries of Japanese companies. Before Joining Global Shares, Rikako worked for Panasonic as an account manager and was responsible for the management of sales and relationships with major Japanese companies.