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Japan's Executive Pay Gap

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Tags Bureaucracy and RegulationLabor and Wages

08/01/2020

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One story has Japanese lawmakers worried about the future of Japanese enterprise. Nobel laureate Tasuku Honjo, whose research led to the creation of the revolutionary cancer drug Opdivo, is suing the company for which he developed the drug; they promised him substantial compensation and subsequently rescinded their offer.

Speaking of the issue more generally, Minister Naokazu Takemoto, who is the minister of IT policy, said that “There is a great gap between Japan and the United States that we have to close.” Namely, there’s a gap in executive compensation that attracts entrepreneurship and innovation away from Japan and to the US. Honjo’s story is a representative example.

His story begins with a lawsuit over patent infringement when US drugmaker Merck & Co. copied the drug from Ono Pharmaceutical Co. Ltd. in Japan and its US counterpart Bristol Myers Squibb Co. The lawsuit was settled in 2017 and entitled Ono-Bristol to $625 million and a percentage of Merck’s net sales of the drug through 2026. According to Asashi Shimbun, Ono promised Honjo 40 percent of the patent royalties from Merck but reneged on the deal, informing him that he would receive 1 percent instead. Honjo is suing Ono for not giving him the share of the money allegedly promised to him.

Ono does not want to pay Honjo more than 1 percent, because “It would be difficult for the company to comply with his demand, which involves a major change in the terms of the agreement, because such a revision would influence contracts with other researchers and the pharmaceutical industry as a whole, industry sources said.”

Looking at this case, one might ask, Who in the world would do business with Ono Pharmaceutical going forward? And is this a typical trend among Japanese firms?

If we look at other discrepancies between Japan and the rest of the developed world, the gap in competitiveness between Japanese firms and others becomes clear. Corporate executives are paid significantly less in Japan. The Japan Times reported, ”The median CEO salary at Japanese companies with revenue of more than ¥1 trillion is one-tenth of counterparts in the U.S., and incentive pay makes up just 14 percent of the total, against 69 percent in America.”

The pay gap extends beyond executives. For example, system engineers straight out of college usually earn ¥200,000–¥300,000 ($2,000–$3,000) a month, whereas the average starting annual salary in America for the same position is close to $6,000 a month. I would be remiss if I did not include a disclaimer, however. Japanese firms have a culture of better benefits like biannual bonuses, transportation, and company-subsidized housing, but it falls short of US compensation and limits the choices that additional income allows.

For recent graduates, there is no negotiation with hiring companies; personal skills and qualifications will not result in higher pay or better benefits in most situations. This stems from a strict collectivist mindset. Seniority determines pay at many firms, not skills or achievement. Low- to upper-level workers are also all subject to arbitrary relocation.

My experience working at a Japanese company in 2018–20 revealed to me that employees do not or cannot negotiate when they are assigned to a new location; their only option is to quit. Your actual department and job are also subject to arbitrary reassignment, sometimes having nothing to do with your interests or skills. These moves can happen as frequently as every two to three years. This results in a phenomenon known as tanshinfunin, where employees move, leaving their families behind for years at a time.

If one word could describe employment and business in Japan, it would be “inflexible.” This does not only apply to innovative scientists like Honjo, but also to executives and low-level employees. As the lack of a competitive edge in Japan becomes clearer, Japanese firms will lose vital human capital to other countries. People with revolutionary ideas and abilities like Honjo will inevitably sell their skills, products, and labor to the highest bidder, which means companies in the US and elsewhere.

Many Japanese companies need to reform their business practices, or they face a brain drain and lost opportunity. Government should facilitate this by rolling back oppressive regulations, taxes, and barriers to competition so that the best Japanese companies flourish and allow inept ones to restructure or fail. Ono’s treatment of Honjo represents the very real need for change lest Japan’s economy falls further behind.

Author:

Matthew Noyes

Matt works for the Japanese Conservative Union, the Japanese counterpart to the ACU, where he promotes free markets and limited government in Asia. A New Hampshire native, he is driven by a passion for liberty to take part in civic discourse and grow the freedom movement worldwide. He holds a bachelor's degree from SUNY Albany where he majored in Political Science and Japanese. He is also a columnist at Lone Conservative.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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