JACD Japan Association of Corporate Directors

Guidelines on Executive Compensation 2013 andRequests for Revision of Regulations and Tax Systems
2013
Guidelines on Executive Compensation 3rd edition

April 2013

Japan Association of Corporate Directors
Dialogue with institutional investors Committee

This translation may be used for reference purposes only. In cases where any differences occur between the English version and the original Japaneseversion, the Japanese version shall prevail.
Copyright on “Guidance for Executive Compensation” is held by the Japan Association of Corporate Directors. All rights reserved.

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JACD Japan Association of Corporate Directors[Table of Contents]

I Executive Compensation – The Status Quo ....................................... 3
II Summary- Guidelines on Executive Compensation ...................... 5
III Guidelines on Executive Compensation ............................................ 6
1. Executive Compensation Policies ............................................. 6
2. Annual Incentive ....................................................................... 8
3. Long-term Incentive ................................................................. 9
4. Post-retirement compensation (compensation for advisors) . 10
5. Compensation Committee ....................................................... 10
・ Data Sheet(1) Comparison of CEO Compensation(2) The image of the CEO Compensation system reform

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JACD Japan Association of Corporate Directors
I

Executive Compensation – The Status Quo

The following characters have been observed on Japanese executive compensation through changes over the last
six years until 2013 following the publication of the Guidelines (2nd edition) and based on the comparison withother countries.

(1) There was no change in the total compensation levels over the last six years. This is the lowest level ascompared to other developed countries (Appendix 1)(2) There was also no change in the low proportion of performance-based compensation to overall compensation.
Japan has the highest rate of fixed remuneration as compared to developed countries (Appendix 1).

(3) The number of companies having a Compensation Committee tends to increase.

(4) In terms of compensation disclosure, individual information on executive officers whose total compensation
exceeds ¥100 million has been started to disclose. However, compensation policies and the type of compensation
are not disclosed at the useful level for investors. The disclosure level is poor as compared to other countries.

The Dialogue Committee with Institutional Investors assigned researchers to conduct a survey titled "Study on the
Actual Status of the Executive Compensation System" followed by that in FY2007. This study included (A) Survey
on the executive compensation system in respondent companies and (B) Analytical examination of experimental
study on executive compensation and corporate value. In addition, a questionnaire to investors regarding executive
compensation was newly conducted.

The experimental study relating to (B) above, which was conducted simultaneously, demonstrated effects ofexecutive compensation on corporate value.

(A) Survey on the executive compensation system showed the following significant results:(a) A large number of companies have determined compensation policies, policies on compensation levels andpolicies on combination of compensation constituents (fixed remuneration, performance-based bonuses,
stock compensation, retirement allowances)(b) A majority of companies have established a Compensation Committee or an organization that can bealternative thereto(c) A large number of companies have a regulation in which rules, authority and purposes are clearly stated(d) About 80% of companies have a Compensation Committee or alternative organization in which external
committee members (external directors, etc.) account for the half of total members

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JACD Japan Association of Corporate Directors(e) About 70% of companies have a Compensation Committee that is headed by an external committee
member (external director, etc.)(f) A large number of companies have abolished retirement allowances(g) A few responses regarding compensation disclosure were obtained in most questions(h) About 60% of companies have linked performance-based bonuses with overall performance at 80% or
higher(i) About 80% of companies have linked compensation with corporate performance centering on financial
indices(j) About 80% of companies have implemented performance-based bonuses that occupy less than 40% of
total compensation of CEO.
(k) About 60% of companies have implemented the long-tern incentive compensation system linked with midor long-term shareholder value(l) A majority of companies have implemented stock compensation that accounts for 20% or lower of totalcompensation of CEO.

As stated above, issues presented in the "Guidelines on Executive Compensation," which was published by the
Association in 2007, started being reflected (not adequately, though) to an executive compensation systems ofindividual companies. It is seen that executive compensation systems in Japan has been improving from thegovernance view point compared to the previous survey.
Moreover, the experimental study relating to (B) above, which was conducted simultaneously, indicated that
executive compensations had a high probability to impact on corporate value.

A questionnaire to investors additionally indicates that a majority of investors are concerned about executive
compensation systems of Japanese companies and pointed out the insufficiency of disclosure items regarding their
executive compensations. Moreover, many respondents indicated the necessity to perform "say on pay" (anon-binding advisory vote regarding executive compensation at a shareholders meeting) and the preference toincrease the proportion of performance-linked compensation to overall compensation.

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JACD Japan Association of Corporate Directors
II Summary- Guidelines on Executive Compensation

The following is the summary of the "Guidelines on Executive Compensation 2013 and Requests for Revision ofRegulations and Tax Systems" (hereinafter, the "Guidelines"), which will be published with an aim to further
promote the reform of developing executive compensation systems, in consideration of the result of the latest"Executive Compensation Survey."[Enhancing short- and long-term incentive compensation to increase, at an early stage, the currently low
proportion of performance-linked compensation as compared to other countries]
The Committee believes that companies should establish a framework allowing them to recognize their executive
officers who make earnest efforts, take risks, achieve results and satisfy shareholders, and to grant appropriate
recompense for their high business performance. Compensation levels for Japanese executive officers remain
significantly low compared to other foreign countries, considering increasing expectations and pressure. It isessential that sufficient award should be given to executive officers who should be deemed as national resources
achieving significant performance for company's progress and economic/social growth (Appendix 1). The
Guidelines are formulated with the aim of encouraging executive officers to focus on improvement of businessperformance by enhancing performance-based compensation. Expanding the balance of short- and long-tern
incentive compensation and setting a target of performance level not far behind other countries such as ROE 15%
will help us to narrow the gap between Japan and the western countries. (First of all, we should target the mid value
between Japan and the U.S., which is a value and a mixture in Europe) (Appendix 2).
[Strengthening disclosure of compensation details]
While publishing the Guidelines, we had been requesting revisions of laws/regulations and tax systems to further
develop executive compensation governance. As a result, actual revisions were made in response to some of ourrequests. In order to urge a further progress, we will now propose the following: (1) usinga uniform basic

template of business report, annual report and corporate/governance report for compensation disclosure; (2)enhancing compensation disclosure in Item (1) by (a) requiring preparation and disclosure of compensation policies,(b) requiring individual disclosure of top management, (c) requiring disclosure of decision-making process
regarding compensation, and (d) improving individual disclosure by type; and (3) considering implementation of
so-called "say on pay" (advice regarding compensation at a shareholders meeting).
[Requesting revisions of laws/regulations and tax systems to unban restricted stocks]
In a bid to further develop performance-based compensation as stated above, we request authorities to remove theban of restricted stocks, and to relax the preferential tax system (to defer tax payment until the time of selling) andthe taxation rules applicable to inconvenient profit-related pay in order to avoid incentive compensation from being
disturbed by disadvantages of laws/regulations and tax systems.

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JACD Japan Association of Corporate Directors
III

Guidelines on Executive Compensation

The committee takes into consideration changes of management remuneration in Japan and the direction to befollowed, and proposes the following Guidelines on Executive Compensation 2013(3rd edition). Although theguidelines are primarily targeted at public companies, the Committee believes that these guidelines will be equallyeffective within other corporations and organizations.
The Committee plans to carry out appropriate annual reviews of the contents of the Guidelines on Executive
Compensation, taking into account opinions from a wide range of interested parties, both domestically andinternationally.

1. Executive Compensation Policies(1) Executive Compensation Policies adopted by individual companies (hereinafter “Compensation Policies”) andshall be built from both corporate and management points of view in order to support the creation of corporate
value on both a short-term and a medium/long-term basis.

(2) Executive compensation should be regarded as consideration paid for executives’ role in managing thecompany, and determined at a level at which the executive receives compensation appropriate to his/herqualifications, ability, and performance results, taking global competition into consideration where appropriate.

(3) Attention should be paid to increasing annual incentive compensation (performance-based compensation) andstock compensation (long-term incentive compensation) to ensure the executive’s accountability by linking his/hercompensation with corporate business performance both on a short-term and medium/long-term basis. The
Compensation Scheme should be designed not only to allow a high degree of incentive to return good businessperformance, but also to decrease the level of payment for poor performance, with a view to avoiding any conflictof interest with stockholders.

In terms of the average CEO remuneration (the overall compensation, which is assumed to be defined as 100%,
consists of 64% of basic remuneration, 20% of annual incentive compensation (performance-based bonuses) and
16% of long-tern incentive compensation), the proportion of annual incentive compensation (performance-based
bonuses) and long-tern incentive compensation are at a lower level, compared to the western companies (refer toAppendix 1). Increasing the portion of annual incentive compensation (performance-based bonuses) and long-tern
incentive compensation to the total average CEO remuneration increases, the relationship between risk and reward
will be heightened in views of accountability to shareholders and achievement of business performance byexecutive officers. The percentage of performance-linked compensation for executive officers other than CEO
should also increase by referring to CEO remuneration.
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JACD Japan Association of Corporate Directors
While maintaining the current level of basic remuneration unless the basic remuneration level is extremely high, we
aim to attain roughly 1:1:1 ratio (basic remuneration: annual incentive compensation (performance-based bonuses):long-tern incentive compensation) in the short term (in 2-3 years), and 1: 2 to 3: 2 to 3 in the mid- or long-term (in10 years). However, a transfer to the above percentage shall be made only when corporate scale, profit (rate),
efficiency, shareholder's return of interest and other related business results are maintained at a level comparable toother countries (Appendix 2).

The above ratio is just an example. An appropriate ratio should be determined by individual companies based on
their management strategies, particulars of the industry and other necessary factors.

A Compensation Committee of respective companies should discuss what compensation level and compensation
component ratio are appropriate with reference to their management strategies and other factors, and then disclosethe details of discussion. Moreover, the Compensation Committee should annually monitor the point on whether
the actual compensation system is operated in line with the target direction.

(4)

Non-executive directors with roles as overseers shall receive fixed compensation rather thanperformance-based compensation in principle. However, the provision of stock compensation (especially restricted
stocks as discussed below) shall be made available. Moreover, someone who performs interlocking roles as both
executive officer and director shall be paid a remuneration mainly for their role as a business executive.
Note: Restricted stock refers to a stock that a shareholder is not allowed to transfer (sell) for a certain period oftime after he/she is granted.

(5) All public companies are required to disclose the following items from their Executive Compensation Policies
under “Corporate Governance” in the company’s annual report:(a) Policies on the purpose and levels of remuneration for executives in each category (fixed remuneration,
performance-based bonuses, stock compensation, retirement allowances, etc.)(b) Total compensation levels (aggregate amount on consolidated basis)(c) The ratio used to combine components such as basic remuneration, annual incentive compensation(performance-based bonuses), long-tern incentive compensation and retirement allowances, etc. and company's
policy on the ratio(d) Types of indicators to evaluate performance for annual incentive compensation (performance-based bonuses),business target levels and units of payment that are linked to business performance. In addition, achievementlevels against business target levels as of the end of fiscal term, which are determined at the beginning of fiscal
term.

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JACD Japan Association of Corporate Directors(e) Policy regarding types of long-tern incentive compensation and amounts allocated to individuals. The details(types of indicators to evaluate performance, fluctuating range, etc.) must be also disclosed when any conditionof performance achievement is applied.
(f) Equation used to determine retirement allowances and policy for allocating these to individuals(g) Process for deciding compensations, including particulars of the Compensation Committee members, clear
statement of committee's authority and regulations, as well as statement of committee's activities for the eachfiscal year (what, when, and how they were determined)(h) Performance comparison charts over one year, five years and ten years against stock market index andcompetitors in the same industry, helping investors to check corporate business performance from the objective
point of view.

2. Annual Incentive(1) The measures used to evaluate business performance should be in agreement with the corporate strategy andconsist mainly of financial indices rather than qualitative measurements. If qualitative measurements are applied,adequate transparency must be ensured in the course of decision-making process through deliberation at a highly
independent Compensation Committee or other appropriate procedure.
(2) Target figures shall be set at the beginning of each fiscal year. Except in special circumstances, subsequent
discretionary adjustments will not be allowed and the compensation shall be paid based on a predetermined formula.
Business targets must be set to reflect corporate competition and the expectations of investors as a precondition forachievement.
(3) The Compensation Scheme should be designed to allow high incentive levels with a view to ensuringaccountability to shareholders as well as enhancing management incentives; for example, several times the targeted
performance-based bonus where achievements exceeded the target to a significant extent. .
(4) Where achievements were much lower than the target, the Compensation Scheme should be designed toreduce drastically the amount or to cut payment of compensation to management in order to share downside risks
with shareholders.
(5) The remuneration of executive officers specializing in a specific business group must be linked to theperformance of their individual business departments as well as the overall company-wide business performance.
(6) With regard to annual incentive compensation (performance-based bonuses), the long-term incentives listed
below, including stock compensation and cash-based mid-term performance bonuses, shall also be paid toexecutive officers so that long-term corporate value will not deteriorate due to management’s focusing on
short-term business achievements.

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JACD Japan Association of Corporate Directors(7) For the purpose of clarifying accountability to stockholders for performance-based results, defined levels ofcompensation shall be classified and paid as fixed salaries and undefined (“variable”) levels of compensation shallbe paid for performance-based results (and no additional undefined levels of compensation shall be paid together
with the fixed salaries within the framework of the defined level of compensation).

(8) Approval of Compensation Committee must be always obtained for target setting at the beginning of eachfiscal term, performance evaluation at the end of each fiscal term and determination of amounts to be paid.
Financial figures, which are used as the basis of evaluation, must be verified through an accounting audit.

(9) Amendment of the taxation system should be made again so that companies can easily record as deductible
expenses relating to performance-based compensation/bonuses under the Corporate Tax Act.

3. Long-term Incentive(1) The following long-term incentive compensation system linked with mid- and long-term shareholder value(hereinafter “Stock Compensation”) should be introduced. A mixture of long-term incentive compensations shouldbe implemented based on the status of individual companies and characteristics of long-term incentive
compensations.
(a) Stock Options (Subscription Rights)(b) Restricted Stocks (Being replaced with Stock Compensation-type stock options, which are derived from stock
option with an exercise price at ¥1, due to no room to correspond in Japanese law and tax systems).
(c) A mid- to long-term cash-based alternative performance bonus with a three to four-year performance
evaluation period.
(d) When the percentage of long-term incentive compensation is raised in the future, a certain performance
condition should be attached on transferring Stock Compensation-type stock option to arouse further incentives(example: a condition that the company should achieve performance superior to that of an associate company inthree years).
(2) A stockholding guideline requiring board members to hold stock in the company shall be established, and will
set a non-binding challenge of “CEO, to hold company’s stock about two to three times of fixed remuneration(annual amount).” In this case, the above-mentioned restricted shares may be included in the number of shares held.
All executive officers other than the CEO will also have to hold similar number of shares as the CEO.

(3) Amendment of the Companies Act and the taxation system should be made so that companies would beallowed to grant restricted stocks.

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JACD Japan Association of Corporate Directors
4. Post-retirement compensation (compensation for advisers)(1) Post-retirement compensations payable as compensation for advisers or consultants will not be provided whenpre-retirement compensations are increased to the globally competitive level. Even though an appointment ofadviser is required, post-retirement compensations will not be paid at a level superior to compensations forincumbent executive officers.

5. Compensation Committee(1) All public companies must set up a Compensation Committee, not only companies who have the newcommittee system, but also the company with internal auditors.

(2)

A Compensation Committee of a company with internal auditors should welcome external committee

members and independent directors. The chairperson of the Compensation Committee should be elected among
independent directors who have assumed office as members for a couple of years (except where the Committee isjust established). Company's directors who also assume office as corporate officers, where applicable, must not
occupy a majority of members and be given voting rights. The member's term of office shall not be extended for along term (example: four years and longer). We aim to develop a framework of Committee that only consists of
independent directors in the next five years.
(3) Full and objective internal and external information shall be provided to external committee members so thatthey are able to make informed decisions.
(4) The opportunity to discuss CEO remuneration shall be given only to external committee members.
(5) The purpose, authority, and regulations of the Compensation Committee shall be stipulated.
(6) The Compensation Committee will make decisions on suitable compensation levels for individual executives
when they achieve good business performance using examples from the Guidelines on Executive Compensation in
conformity with the creation of corporate value in the mid- and long-term.
(7) The Compensation Committee will submit a statement of activities for each fiscal year to both the Board of
Directors and the Board of Auditors, also required to release an annual statement that discloses the following items
on Executive Compensation under “Corporate Governance” in the annual report.
(a) Particulars of the Committee(b) Authority and regulations of the Compensation Committee stipulated(c) Statement of activities for each fiscal year (what, when, and how they were determined).

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JACD Japan Association of Corporate Directors
Dialogue with institutional investors Committee
Chairman
Co-chairman

Takeo Takasu
Prof. Hiroshi Ohtsuki

Senior Adviser, NAMCO BANDAI Holdings Inc.
Waseda University

Executive Compensation Working Group
Guideline
Naohiko Abe
Makiko Konishi
Revision of Regulations and Tax Systems
Prof. Kenji Kawamura
Kazumi Hirai
Research
Prof. Mutsumi Sakai
Assistant Prof. Hiroshi Yoshida

Managing Director, Towers Watson
Consultant, Towers Watson
Rikkyo University
Partner, Deloitte Tohmatsu Tax Co
Obirin University
Kyoto Industry University

Enquiries : http://www.jacd.jp/en/

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Copyright on “Guidance for Executive Compensation” is held by the Japan Association of Corporate Directors. All rights reserved.

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