Setting Director Compensation under Japanese Company Law

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Director compensation is not simply an amount chosen by the chief executive. Under the Companies Act, compensation must be determined in the articles or by the shareholders when the articles do not provide the required terms. Companies often discover missing resolutions only when an investor or due-diligence team reviews past payments.

Shareholder approval and allocation

A common structure is for the shareholders to approve an aggregate compensation ceiling and for the board to allocate amounts among individual directors. The resolution and delegation must be documented clearly, and actual payments must remain within the approved framework. The company should verify whether previous resolutions continue to cover the current board and compensation structure.

Non-cash compensation

Equity awards and other non-cash compensation require additional resolution terms under the Companies Act. A company considering restricted stock, stock options or another incentive plan should coordinate the corporate approval, plan documents, securities-law analysis and tax treatment rather than treating the award as an extension of ordinary monthly compensation.

Changes and individual rights

Increasing or restructuring compensation may require new corporate approvals. A reduction also requires care: even where the aggregate ceiling allows a lower payment, the relationship with an individual director and any prior agreement may limit unilateral changes. Record the approval, allocation and the effective date of each change.

Company law and tax are separate

A payment may satisfy the Companies Act procedure but still face different treatment under corporate tax rules. Timing and method of revision can affect deductibility. Corporate counsel and the company’s tax adviser should therefore review their respective issues before the payment schedule is changed.

Preparing for outside investors

Before financing, compare the shareholder resolutions, board records, payroll data and financial statements. If employee-directors receive a separate employee salary, document how that component is distinguished from director compensation. A clear record reduces questions during due diligence and supports later changes to the compensation system.