IF you want to know why many Japanese chief executive officers fall short as leaders, look no further than how they’re paid.

    That’s the view of Atsushi Saito, who ended an eight-year stint as head of Japan Exchange Group Inc. in June. Japanese CEOs are underpaid, according to Saito.

    Not only that, most of their salary is fixed regardless of performance and they won’t make bold decisions for fear of missing out on cushy adviser roles after they retire, he says. The solution: pay them more, link compensation to the share price and part ways when they step down.

    “Right now, there isn’t much attraction to being a CEO,” said Saito, 76, who’s currently non-executive chairman of private equity firm KKR Japan Ltd., where he works two days a week. “What competent person would do the job?”

    The median CEO salary at Japanese companies with revenue of more than 1 trillion yen (US$8.4 billion) is one-10th of counterparts in the United States and incentive pay makes up just 14 percent of the total, against 69 percent in America, according to advisory company Towers Watson. Most CEOs in the Nikkei 225 Stock Average get less than 100 million yen a year.

    While Saito sees the high compensation levels in the United States as “sick,” he says Japanese businesses should give CEOs at least 200 million yen a year to encourage more risk-taking and also attract better people.

    Japanese equities rallied in 2015 in part because of investors’ convictions that Prime Minister Shinzo Abe will help reinvigorate a stagnant economy and business environment. While there are signs the government’s push for corporate government practices and higher profits are making an impact, critics including Goldman Sachs Group Inc. say the changes don’t go far enough.

    Adequate compensation is the “missing carrot” in Japanese governance reforms, Goldman said in an October report, citing the low level of incentive pay. The firm argued that Japanese tax laws should be revised to allow more performance-linked pay, while compensation details should be made more transparent. It noted that reforms in Germany after 1998 resulted in a closer linkage between executive compensation and corporate performance.

    One of Saito’s last acts while running the stock exchange was to design a corporate governance code for Japanese firms. The set of rules that started applying to listed companies in June says management’s pay should include incentives to promote “healthy entrepreneurship.”

    “I want CEOs to have Inamori san or Nagamori san’s spirit,” says Saito, referring to Kazuo Inamori and Shigenobu Nagamori, the founders of Kyocera Corp. and Nidec Corp., both of whom are known for their dynamic management styles. Cushy advisory roles should be abolished, but “whether it’s pension plans or stock options, it doesn’t matter — CEOs should be paid more.” (SD-Agencies)