Public and Private Firm Compensation Compared: Evience From Japanese Tax Returns

Most studies of executive compensation focus on publicly traded companies. The high levels of compensation in public companies are often attributed to agency slack arising from ownership by diffused shareholders. If so, pay at private companies, more closely held, should be lower. Governments in the United States and elsewhere do not require private companies to disclose the pay of their executives, but until 2004 the tax office of Japan published the name and tax liability of any individual paying over some $100,000 in tax. We match this tax data with executive rosters of about 1,400 public and 4,100 private corporations. We find that public and private company presidents have similar incomes. Incomes rise with company size and profitability in both, but incomes are more sensitive to profitability at public firms. In Japan, at least, public firms pay their presidents no more than private firms do, and they tie that compensation more closely to observable performance benchmarks, not less.