Executive Compensation By Any Other Name

Ezra Klein has an admiring word for the Japanese sensibility on executive pay:

The chairman of Toyota makes $1.5 million. The CEO of Toyota makes less than $1.1 million. So does everyone at Panasonic. More here. It's a reminder that CEOs aren't just paid what the market will bear, they're paid what the culture will accept.

As I wrote Ezra in a private email, I'm not sure we should be so admiring of Japanese restraint.  At least when I was working in corporate America, multinationals were renowned for the expense accounts that topped up their salaries.  All expense systems get abused on the margins, of course, but Japanese executives were reportedly able to expense things like million dollar golf club memberships which were not exactly used solely for the purposes of business.  The Germans also seemed to have extraordinary leeway with their expenses.  These things don't happen in America because the tax code strongly disfavors them--so executives get tax-advantaged stock compensation instead.

Now, this is not to say that American CEOs do not make more than their counterparts.  First of all, it's been (yeesh!) ten years since I worked for a non-media corporation, so things may have changed a great deal--or my recollection may simply be faulty.  (Readers are invited to comment).  Second of all, even expensing golf memberships and homes at outrageous prices, I don't see how you get from $1 million to, say, the $8 million that Rick Wagoner was making before GM went bust.  Rather, it's that when you take "effective compensation" into account, the multiple might be lower than a straight exchange-rate comparison would suggest.  Culture matters, but so does the tax law and the accounting rules about how compensation is disbursed. 

In general, you can assume that companies will compensate their executives in whichever manner is a) most tax favored and b) makes the headline number as small as possible--not just to avoid the beady eye of the regulators, but also to grease things past the shareholders.  The American tax code is not very good at collecting money from corporations, but it is very good at getting companies to change expenditures into more tax-advantaged forms, which is why the once legendary American expense accounts became, by the nineties, rather meager by international standards.  Different countries have made different choices about those rules which may alter the headline salary figure, but not necessarily the lifestyle of the executives.

Update:  Ezra points out that I misread his ambivalence about the Japanese system to be praise.  As I note in my second post, I think there are valid reasons to be concerned that CEO pay is the result of board capture or other worrisome processes, though ultimately I've been convinced that this is not the case.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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