Increase in Director Compensation Ceiling Proposals (Japan)
Background and Overview
Shareholders in Japan do not have a "say on pay" advisory vote on executive compensation. However, by law, they are given a vote on any changes to compensation programs for directors – most of whom are senior executives of the company. Compensation in Japan is rarely excessive or controversial, but has been criticized for being insufficiently linked to performance. Historically, director pay has been primarily seniority-based, but in recent years some companies have introduced performance-based compensation. It is in shareholders' interest to encourage this emerging trend, to better align the interests of directors with those of shareholders. Where a company has underperformed its peers, in terms of shareholder returns and efficient use of capital, shareholders should be skeptical of compensation increases with no performance hurdles attached.
Key Changes Under Consideration
Current ISS policy is to generally recommend FOR increases to aggregate compensation ceilings for directors, unless there are serious concerns about corporate malfeasance. The policy under consideration would continue to recommend FOR increases in director compensation ceilings where there is a clear and convincing rationale for the increase or the increased pay is explicitly linked to performance. In the majority of cases, where only boilerplate reasons for the increase are presented and no link to performance is disclosed, ISS proposes to take a Case-by-Case approach, taking into account the company's short- and long-term share price performance and capital efficiency (measured by ROE) in determining a recommendation on the increase.
Intent and Impact
The intent of ISS' proposed policy change is to promote greater use of performance-linked compensation by looking more critically at increases in compensation that are not clearly tied to performance. The policy is expected to result in a greater number of recommendations to vote against increases in director pay at companies which stick to the seniority-based pay model. If an increase in the director pay ceiling is voted down by shareholders, the existing ceiling remains in effect.
Request for Comment
Please feel free to add any additional information or comments on the proposed policy change. In addition, ISS is specifically seeking feedback on the following:
- Does your organization support taking share price performance and capital efficiency into account when evaluating increases to director compensation in Japan? Are there other criteria that your organization would prefer be used in addition to, or instead of, these factors?
- Where companies do link some or all of directors' compensation to performance, which performance metrics are most appropriate for them to use?
- Would your organization take a more lenient approach when evaluating increases to director compensation at companies where compensation is lower, either on an absolute basis or relative to peers?
- Should factors such as an increase in board size or growth in the complexity of the business justify a director pay increase that is not linked to performance?
To submit a comment, please send via e-mail to policy@issgovernance.com.Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.
All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.
