Is Fixed Salary 'Fixed'? Fixed Salaries in Managerial Compensation Depend on the Firm Performance in Japan

Abstract

This study explores the managerial compensation contract in Japan. In particular, we shed light on the fixed salary in managerial compensation and demonstrate that the fixed salary and firm performance have a significant relationship in Japan. Generally, regardless of the firm performance under given fixed salary contracts, managers obtain the determined salary based on initial contracts. However, we find that when the firm achieves high current earnings and stock return, the manager obtains high fixed salaries in Japan. In other words, Japanese firms set fixed salaries as incentive compensation to reward managers. In Japan, we cannot specify the details of the compensation contract on several firms, and therefore, fixed salaries, which Japanese firms disclose, are used to coordinate managerial compensation in each period. When firms set fixed salaries based on performance, they may not be able to ensure firm governance because they cannot explain precisely the determination of the managerial compensation contract to stakeholders. This fact suggests useful insight into the disclosure regulation to the regulator.

Keywords: managerial compensation contract, fixed salary, performance evaluation, management earnings forecast

JEL Classification: M41, M48, G14