Pay check

TO PROMOTE team spirit among their loyal, lifelong employees, Japanese bosses live in modest houses and take the metro to work. They also keep the pay gap between themselves and workers tiny by international standards (see chart). To them the news that SoftBank, a telecoms and internet firm, paid its former, Indian-born president, Nikesh Arora, ¥31.5 billion ($300m) in two years defies comprehension. Bosses at the biggest firms receive ¥100m ($1m) a year on average.

Corporate-governance experts are used to grappling with excessive executive pay. In Japan, they are pondering how big a problem rock-bottom compensation may be. The earnings of bosses at listed firms weigh in at roughly a tenth of what American executives get. Foreign bosses in Tokyo, such as Mr Arora, or Carlos Ghosn of Nissan, a car firm, come near the top of global league tables, but very highly-rewarded local executives are extremely rare.

Low compensation doubtless contributes to a cautious culture in which many firms prefer to sit on vast piles of cash—non-financial firms now hold more than ¥1 quadrillion ($9.5 trillion) of financial assets, including cash—rather than invest in risky new projects. Japanese firms whose bosses receive fatter paychecks outperform peers, according to a recent study from Goldman Sachs, an investment bank.

Not only is there too little financial incentive to make bold bets, but there are social penalties if things don’t work out. If a risky new tack fails, that could mean losing face, being forced to cut the workforce or forfeiting the privilege of staying on well past retirement as a paid adviser.

Japanese companies have recently started making better returns, partly because of a new corporate-governance code introduced by Shinzo Abe, the prime minister, in June 2015. The government took care to include in its new code a recommendation that firms lift the variable bit in pay packages that is linked to long-term results. Such incentive-based pay makes up just 14% of packages in Japan, compared with 33% in Germany and 69% in America, according to Towers Watson, a human-resources consultancy. Accordingly, two Japanese giants—Shiseido, a cosmetics firm, and Obayashi, a builder—began for the first time to offer their executives stock-option plans tied to corporate performance.

But the unintended effects of an ill-conceived regulation from 2010 may yet hold back much-needed change on pay. Back then, securities regulators required listed companies to disclose, for the first time, all bosses earning above ¥100m. The idea was to increase transparency for investors (before, companies disclosed only the sum of the total executive-pay pot, for shareholder approval). There were hardly any that met the threshold—in 2014 only executives at 9% of listed firms had to be outed.

Even so, it was considered embarrassing to be named. Naohiko Abe of Pay Governance, which advises corporate compensation committees, says he was inundated with calls early on checking what others firms’ bosses were being paid. In the West, such transparency has tended to have the effect of raising the compensation of comparatively underpaid bosses. In Japan, some quickly took a pay cut so as not to appear on the list, says Mr Abe. In particular, says Nicholas Benes of the Board Director Training Institute of Japan, which promotes better governance, the ¥100m-disclosure rule inadvertently sets a limit on lifting the incentive portion of pay cheques (salaries are mostly cash-based).

Still, there has been progress. The number of bosses earning $1m, or enough to require disclosure, has risen from fewer than 300 to just over 500 since 2009. Some people want to go further. Takeshi Niinami, the boss of Suntory, a drinks giant, and a prominent adviser to the government, thinks that firms should eschew thresholds and simply disclose the compensation of all their best-paid people. Openly paying bosses oodles of cash and stock options might work best in topsy-turvy Japan.