The determinants of executive compensation and its effect on company performance in Japan and the UK
The purpose of this thesis is to analyse directors' incentives in large companies in Japan and the UK, with particular emphasis on the relationship between corporate governance and executive compensation. This thesis seeks to contrast the effect of corporate governance on the determinants of executive pay, by comparing the UK and Japan. Firstly, this research estimates the determinants of executive compensation in Japan. We find a positive relationship between an employee's wage and a director's salary, which is consistent with our hypothesis that both directors and employees are paid in similar ways. In contrast, this research can not find any relationship between shareholders' return and directors' pay in Japan, suggesting that directors have little incentive to pursue shareholders' interest. In contrast, this research finds that top pay in the UK is positively correlated with most company performance variables, including profit, stock market capitalisation and sales, which is consistent with our hypothesis that shareholders in large UK companies have relatively strong powers to control top managers and their compensation through remuneration committees. This research also analyses the effects of company's pay policy on corporate performance. Our analysis on data from the UK shows that there is a positive relationship between `company's pay policy' and firm performance. The company with an annual bonus scheme is more likely to improve company profit and earnings per share, for example. In contrast, there is no relationship between pay-performance sensitivity and firm performance in Japan, showing that the performance-pay sensitivity does not affect company performance in Japan's large companies, or the directors in those companies are not motivated by the change in performance-pay sensitivity.