International executive compensation design and negociation
May 17, 2022
Background
Our firm has long worked on negotiating executive compensation and departure agreements for foreign and domestic directors.
In such cases, we have consulted with our clients on how to reach a compromise. I have been consulted on who should be the next director, how the succession should take place, and how to overcome obstacles, or I have negotiated directly with the client to reach the desired point. I have been involved in designing the company’s vision, contacting experts in headhunting and compensation design, and assisting in the preparation of term sheets.
Insight
When negotiating compensation outside of Japan, I saw cases where directors at the headquarters in Japan were paid less than those at the foreign offices, and I was reminded that compensation design is extremely important in order to get the best talent.
I also realized how important it is to design the base compensation, LTI (long-term compensation), STI (short-term compensation), etc., in order to drive executive performance. I believe that my overseas experience will be useful in designing compensation in Japan today, especially for management professionals. Of course, I would be happy to assist you in designing compensation overseas as well.
There are criticisms that compensation design is only indirectly motivated and is not essential, or that compensation design is too much like a miracle drug, and that if it goes too far, it can be problematic from a compliance standpoint, and that it loses its long-term perspective. Certainly, direct motivations such as who you work with, what kind of work you do, and what kind of discretionary work you do are very important, and it is understandable that designing compensation that ignores these motivations makes no sense.
However, a company is accountable to explain how it is rewarding its stakeholders. Saying that compensation is not inexpensive is no longer enough to convince anyone. Bringing in talented people, raising the share price, and ensuring that there are no risks are important needs for many shareholders and institutional investors, and they want to hear a reasonable explanation.
The Current Situation and What We Can Do
ESG investing has become a trend in recent years, as well as the need to include it in compensation metrics. When talking about ESG investing, whether it is profitable or not does not get to the heart of the matter. How to think from a long-term perspective is the key point in ESG investment, and we recognize that ESG investment is positioned as accountability to society, a cautionary tale about not speculating from a short-term perspective in the future, which can easily be harmful to society. If social criticism should occur, we, as institutional investors entrusted with pensions and other funds, will not be able to fulfill our accountability. We need to be aware of the fact that this is how much social transformation is taking place.
Our firm is capable of handling such cases, including contract negotiation in the “shuraba” (the “shuraba” is a term used in Japan to describe a situation in which a company is forced to negotiate a contract with another company), while incorporating Japanese and foreign cases. In such cases, we will take various steps to avoid as much friction as possible for our clients. We can take a long-term perspective, including taking over retiring directors, preventing other key personnel from being taken over, and other soft landings.
We would be happy to discuss this with you once you are concerned about omissions. Together, we hope to create a model compensation design that can be emulated by other firms in order to create a new industry in Japan, so that many firms will be able to make the right decisions while taking risks.
We will work with accountants and compensation design specialists to create term sheets and contracts for difficult compensation designs.
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