Executive Compensation in Japan

In this paper I draw mostly on the findings from my own recent studies of Japanese executive compensation and present an overview of executive compensation in Japan in a comparative perspective with the U.S. Particularly noteworthy findings include: (i)internal labor markets for executives are more developed in Japan than in the U.S. although internal labor markets for executives in the U.S. are far from insignificant; (ii) CEO compensation in Japan is structured to encourage young managers to develop long-term relationships with the company, whereas the reverse incentive exists in the U.S.; (iii) CEOs working for keiretsu affiliated firms in Japan are paid significantly less than those working for independent firms, suggesting the effective checking on top management's power to raise their own pay by the main bank; (iv)the role of capital investment in the determination of CEO compensation is more important for keiretsu firms than for independent firms, pointing to the importance of the main banks interest in the objective function of the keiretsu firms; and (v) explicit forms of executive compensation (salary and bonus) are positively correlated with the number of insiders at each firm, cetris paribus for both nations, supporting the insider trading model