Harakiri: Is Japanese Managerial Compensation "Sticky"?

Abstract

In this study, mainly focusing on the fixed salary, we document the managerial compensation contract in Japan empirically. In particular, this study examines the asymmetric sensitivity of managerial compensation, depending on the firm's performance, because, in managerial compensation practice, one can confirm the stickiness of managerial compensation. In this study, we define asymmetric compensation behavior depending on the firm performance as sticky or anti-sticky based on previous cost behavior studies. From our analysis, surprisingly, we find that managerial compensation is not only non-sticky in Japan, but also Japanese firms use the fixed salary as a punishment device. In other words, while conventional wisdom reveals the existence of stickiness in the managerial compensation contract, our evidence shows a significant decrease in managerial compensation, i.e., the anti-sticky compensation, in Japan when firms cannot achieve the previous performance. This managerial compensation practice, where executives take responsibility for the deterioration of their company's performance through their compensation, is similar to the traditional Japanese self-punishment act, harakiri, and can be considered a typical practice of managerial compensation in Japanese culture.

Keywords: managerial compensation contract, fixed salary, performance evaluation, managerial compensation stickiness, punishment

JEL Classification: M41, M48, G14