Performance Sensitivity of Executive Pay: The Role of Foreign Investors and Affiliated Directors in Japan

• DOI: http://doi.org/10.1111/j.1467-8683.2012.00923.x
• Author: Toru Yoshikawa,Asli M. Colpan
• Date: 01 November 2012
• Published date: 01 November 2012

Performance Sensitivity of Executive Pay:

The Role of Foreign Investors and Aff‌iliated

Directors in Japan

Asli M. Colpan and Toru Yoshikawa

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study investigates the effects of corporate governance factors on the f‌irm performance and

executive compensation linkage. Specif‌ically, we examine how domestic corporate-appointed directors, bank-appointed

directors and foreign ownership moderate the relationship between f‌irm prof‌itability, sales growth, and executive bonus

pay in Japanese f‌irms.

Research Findings/Insights: Using a sample of the largest Japanese manufacturing companies from 1997 to 2007, we f‌ind

that corporate-appointed directors positively moderate the relationship between f‌irm growth and bonus pay, while foreign

shareholders exhibit a positive moderating effect on the relationship between f‌irm prof‌itability and bonus pay. Bank-

appointed directors are straddled between their prof‌itability orientation and relational role: They link f‌irm prof‌itability and

bonus pay, but also show positive inf‌luence on the f‌irm growth and bonus pay relationship.

Theoretical/Academic Implications: This study makes a contribution to research on ownership heterogeneity and execu-

tive compensation by empiricallyshowing that different owners and directors aff‌iliated with certain ownership groups have

varied implications on the f‌irm performance–executive pay relationship. It also makes a contribution to research on

corporate governance change by providing insights on how different actors facilitate shifts in the linkage between perfor-

mance and pay.

Practitioner/Policy Implications: Our f‌indings offer insights to stakeholders to pay attention to ownership structure and

board composition in acknowledging the varied f‌inancial motivation of executives to pursue growth and/or prof‌itability.

Keywords: Corporate Governance, Executive Compensation, Ownership, Board of Directors, Japan

INTRODUCTION

Since executive compensation is one of the important

governancemechanisms to monitor, motivate, and disci-

pline CEOs and senior managers, a large number of studies

examine its determinants and performance effects. Among

many topics related to this issue, one of the most researched

aspects is the linkage between f‌irm performance and execu-

tive compensation (Barkema& Gomez-Mejia, 1998). As prior

studies on the relationship between performance and pay

yield mixed results,researchers have been investigating other

factors thatmight inf‌luence the f‌irm performance and execu-

tive compensation linkage including ownership characteris-

tics (Finkelstein & Hambrick, 1989; Hill & Phan, 1991).

Although previous research has been insightful on the rela-

tionships between ownership concentration and perfor-

mance sensitivity of managerial compensation (Conyon,

1997; Hartzell & Starks, 2003), it is less comprehensive

regarding the effects of the nature of the ownership (David,

Kochhar, & Levitas, 1998). Further, many of those studies are

conducted in the US context, and there have been relatively

fewer studies that examine this linkage issue in other geo-

graphical contexts such as Europe and Japan.1

Prior work that examined the relationship between the

nature of ownership and executive compensation has fol-

lowed Brickley, Lease, and Smith’s (1988) categorization of

institutional investors in US f‌irms, and argued that institu-

tional investors differed in terms of their inf‌luence on execu-

tive paydepending on the existence of business relationships

those investors have with their invested f‌irms (David et al.,

1998). Those studies that looked at performance sensitivity

often focused on the relationship between a f‌irm’s stock

*Address for correspondence: Asli M. Colpan, Graduate School of Management,

Kyoto University, Yoshida Honmachi, Sakyo-ku, Kyoto, 606-8501, Japan. E-mail:

colpan@gsm.kyoto-u.ac.jp

547

Corporate Governance: An International Review, 2012, 20(6): 547–561

© 2012 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2012.00923.x