"How Are Executive Compensation Packages Determined?"... Financial Supervisory Service to Strengthen Disclosure Requirements Starting May 1

Disclosure requirements for executive compensation at listed companies will be strengthened so that investors can better assess the appropriateness of executive pay. Total compensation must now be presented together with performance indicators, and stock-based compensation included in the total must be distinguished from stock-based compensation that is excluded.

The Financial Supervisory Service announced on April 27 that a revised corporate disclosure form reflecting these changes will take effect from May 1. The revision follows the Financial Services Commission’s “Corporate Disclosure Improvement Plan to Enhance Capital Market Accessibility and Shareholder Rights” announced in November of last year.

Going forward, when disclosing the total compensation for executives, companies must present performance indicators such as operating profit and total shareholder return (TSR) in a table format. Additional indicators may be provided depending on company characteristics, and companies are also required to explain the relationship between executive compensation and performance using graphs and other means. Previously, only the total amount of compensation for directors and auditors was disclosed, without separate performance indicators, making it difficult for investors to determine whether the compensation levels were appropriate.

Disclosure requirements for stock-based compensation, such as Restricted Stock Units (RSUs), will also be strengthened. Listed companies must distinguish between stock-based compensation included in the executive’s total compensation and stock-based compensation balances that are not included, and disclose each separately. This measure addresses the difficulty investors faced in identifying the specific details of executive stock-based compensation.

The disclosure forms will also change. The “Individual Executive Compensation Statement” will now include an additional form for “Other Stock-Based Compensation Grant Status,” such as “Stock Option Grant Status.” Previously, information about executive compensation and stock option grants was listed in separate sections, making it inconvenient for investors to assess stock-based compensation in connection with individual pay.

In addition, the disclosure period will be expanded from the current fiscal year to three fiscal years to allow for year-over-year comparisons of changes in executive compensation. Companies will also be required to break down total executive pay by type of income, such as salary and bonuses.

An official from the Financial Supervisory Service said, “We will review the executive compensation disclosures submitted after the revision of the disclosure forms, and require corrections in case of insufficient information, to ensure that listed companies provide thorough executive compensation disclosures.”

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