Japanese companies may come under more pressure to ensure transparency on executive pay in 2019 after Nissan Motor Co.'s former boss Carlos Ghosn was arrested on suspicion of underreporting billions of yen in remuneration.

Attractive pay that matches global standards is a must in hiring the best talent available. But hefty compensation to top foreign managers can still trigger a backlash in Japan, where Japanese executives are far less well paid than their peers in the United States and major European countries while the disclosure requirement for companies is deemed weak.

[Gamma-Rapho/Getty/Kyodo]

Having built a successful career in saving the major Japanese automaker from bankruptcy, Ghosn has often been singled out for his high salary, being paid as much as 1.1 billion yen ($10 million) in fiscal 2016 based on the company's securities reports -- the 30th largest remuneration package on record in Japan.

Following his arrest in November, Ghosn, who has been ousted as Nissan chairman but remains CEO and chairman of Nissan's largest shareholder Renault SA, has denied falsifying securities statements.

Investigations have shown so far that Ghosn believed he did not have to report his planned post-retirement remuneration in the securities reports. He also told prosecutors that he did not want company workers to lose motivation after learning about his large pay packages, according to sources close to the matter.

"In Japan...when it comes to remuneration, many companies focus on in-house fairness between employees and executives, who have often built up their careers in the same company," said Yu Asai, manager at Deloitte Tohmatsu Consulting LLC.

In the United States and European countries, however, executives brought from outside are distinguished from employees and regarded as deserving larger pay as long as they deliver and make profits, Asai said, while noting that those countries have well-established disclosure of the decision-making process behind executive remuneration.

In the case of Nissan, the company had effectively given Ghosn, who had been in the automaker's leadership for nearly two decades, discretion over executive pay, which critics say, in turn, may have allowed him to engage in the alleged financial misconduct.

Nissan also had no compensation committee, a body that generally comprises mainly external directors, to assess executives' performances and decide on their remuneration.

More Japanese companies have been introducing such a system in recent years as part of efforts to improve corporate governance. But an industry ministry survey released in March showed that less than 40 percent of companies listed on the First Section of Tokyo Stock Exchange had set up compensation committees.

The disclosure system on executive remuneration in Japan compared to U.S. and European standards also remains "inferior," said Daiki Fujino, a researcher at Daiwa Institute of Research.

In Japan, a rule came into effect in fiscal 2009 requiring companies to disclose the names of executives and the breakdown of their compensation packages when annual pay amounts to 100 million yen or more.

But explanations on the issue in annual securities reports usually amount to a single page or two, compared to dozens of pages in the United States and Europe, according to Fujino.

"If the process of deciding remuneration is explained in detail by the company, including how pay reflects past business performances, it would lead to acceptance by the public, investors and other stakeholders," Fujino said.

Japan's financial watchdog, for its part, is seeking to enhance transparency over remuneration following Ghosn's arrest, eyeing a Cabinet Office ordinance revision to oblige listed companies to disclose how they decide executives' remuneration from next April.

The Financial Services Agency is also considering urging companies to promote setting remuneration that reflects business performance.

A Justice Ministry panel, meanwhile, is preparing to compile a plan to revise legislation that currently allows shareholders to set the total amount of executive remuneration but has been interpreted as giving representative directors the sole discretion to decide how the total is shared out.

Analysts say the level of executive pay has been on the rise in Japan amid an increase of mergers and acquisitions of foreign firms and the recovery of the economy in recent years, with the upward trend set to continue as companies compete globally and look for the best possible talent.

The median value of a president's remuneration at 41 Japanese companies with annual sales of 1 trillion yen or more totaled 98.55 million yen in 2018, up 34 percent from 2015, according to a survey by Deloitte Tohmatsu Consulting.

But compared globally, the Japanese level remains low, with the median remuneration figure of chiefs of major companies in the United States 17 times higher at 1.68 billion yen in the United States, 593.84 million yen in Britain and 336.32 million yen in France.

Takaki Nakanishi, CEO at Nakanishi Research Institute, expressed concern that Ghosn's case may cast a shadow on the country's quest for talent.

"I'm really afraid that this incident will discourage excellent talents globally who have a passion to come to Japan and be part of Japanese corporations and make Japan successful," Nakanishi, an automobile industry analyst, said.

"Japan essentially has good engineers but the management capability is not that good. We need many, many talents to run businesses here," Nakanishi said, calling for enhanced disclosure on the decision-making behind remuneration setting and appropriate accounting at companies in exchange for offering higher pay for executives who deserve the rewards.

The highest-paid CEO in the United States in 2017 was Hock Tan at semiconductor maker Broadcom Inc. at $103 million, according to data by the American Federation of Labor and Congress of Industrial Organizations.

Meanwhile, the highest-paid executive in Japan since comparable data became available from fiscal 2009 was SoftBank Group Corp.'s former Vice Chairman Nikesh Arora, a former Google LLC executive, who received 10.35 billion yen in fiscal 2016, according to Tokyo Shoko Research.