Japanese Firms Embrace Employee Stock Incentives to Retain Talent and Bolster Share Prices

In a strategic move to retain talent and align their employees' interests with company performance, Japan's corporate landscape is witnessing a surge in employee share incentive programs. Airline operator ANA Holdings (9202.T) is the latest Japanese company to jump on this trend, announcing plans to offer approximately $60 million worth of shares to thousands of its employees.

As part of this initiative, ANA will distribute 100 shares, each valued at around $20, to roughly 70% of its nearly 45,000 employees in November. This decision follows in the footsteps of other major Japanese corporations like Omron (6645.T) and Sony Group (6758.T) who have already implemented similar schemes.

The motivation behind these employee share incentive plans is fueled, in part, by one of the most severe labor shortages Japan has experienced in years. Moreover, the Tokyo Stock Exchange has urged listed firms to be more attuned to their share prices, expressing concerns that too many companies are trading below their book value.

Data from Nomura Securities reveals that in the last five years, the number of Japanese companies offering equity-based compensation to employees has doubled to 966, representing a quarter of the approximately 3,900 listed firms. Experts see this trend as a positive development for the market, as higher stock prices directly boost these incentives.

By transforming more employees into shareholders, corporate leaders hope to foster a deeper commitment to their company's effectiveness, financial performance, and, consequently, its stock performance. Raising corporate value is a pivotal goal for investors in Japan, where numerous stocks are chronically undervalued. In response, the Tokyo Stock Exchange called on firms in March to disclose long-term plans to enhance capital efficiency.

Hitoshi Tanimura, senior general manager at the human resources department of Omron, explains that their stock incentives aim to "align management, employees, and shareholders." Similarly, Sony has recently revamped its incentive framework to make it more attractive.

At ANA, there is a requirement that employees hold onto their shares for three years before they can sell or transfer them. According to Shintaro Takano, a general administration executive at ANA, "The stock incentives are aimed at beefing up engagement with employees and promoting their interest in raising corporate value."

Stock-based compensation, which initially targeted managers, gained popularity after former Prime Minister Shinzo Abe introduced corporate governance reforms nearly a decade ago. These reforms made such incentives more tax-deductible. Today, employee stock incentives also serve as a means for companies to replace cross-shareholdings, a practice criticized by international investors.

Despite the growing popularity of employee stock incentives in Japan, only a quarter of the top 100 Japanese companies have adopted such programs, compared to over 80% in the United States and Germany, according to data from consulting firm Human Resources Governance Leaders. Experts cite labor laws mandating employers to pay wages in actual currency as a hurdle to wider adoption, as stocks can only complement wages rather than replace a portion of them.

Shinji Ishikawa, senior chief manager at Mitsubishi UFJ Trust and Banking's human resources solution services division, believes that greater legal flexibility would expedite the adoption of stock incentives in Japan.

Source: Reuters

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