“Finding the best incentive system for Mercari as it aims to become a global tech company”
On December 18, 2018, Mercari announced the implementation of a new incentive system using Restricted Stock Units (RSU). Why did Mercari choose RSU, a system uncommon in Japan?
We interviewed two of the people in charge of implementing the new system, nose from Incentive & Equity Planning and Hiroyuki Takahashi from People Experience. They told us about the road to implementing a system granting RSU to over 1,000 employees, the first of its kind in Japan, including Mercari’s resolve to become a global tech company and management’s hopes and expectations for employees.
Mercari’s new incentive system, RSU: what is it?
ーFirst, what kind of system is RSU?
nose：The term RSU stands for “restricted stock unit.” To put it simply, employees are granted rights to receive stock. After they remain working at the company for a certain amount of time, those rights are finalized, and the employees actually receive the stock.
ーSo employees aren’t guaranteed to receive stock when they are granted rights?
nose：Right. For example, let’s say Mercari promises to grant you a certain number of shares of Mercari stock, but only under the condition that you continue working at Mercari through a certain date. Once that date passes and you meet that condition, that’s when you first receive the stock. In the time before that date (the vesting period), all employees work together to improve Mercari’s businesses and corporate value, and as a result, everyone shares the rewards. That’s what makes RSU unique.
ーIn the past, Mercari used stock options for the incentive system. How is RSU different?
Takahashi：The RSU incentive system provides high economical benefits to employees, just like stock options. However, there is one big difference. Stock options are a stock price rise based incentive system, where the economical benefit to employees comes from the amount the stock price rises above the exercise price. On the other hand, RSU is a full value system, where employees benefit from the full stock price at the time the rights are finalized.
ーMercari went public on TSE Mothers in June 2018. Why didn’t we continue with the stock option system?
nose：The stock options Mercari granted are called “tax-qualified stock options.” In addition to the tax incentives these provided, we were able to use the fact that our company value was relatively low as an unlisted company to keep the exercise price low.
ー I see. And once we went public, we lost some of the benefits we had as an unlisted company?
nose：For tax-qualified stock options, roughly speaking, the exercise price basically becomes the stock price. If you receive the rights to buy shares worth 1,000 yen for 1,000 yen, there’s no rise in price, so there’s no benefit to exercising them, right? But with RSU, you can get the full value of the shares. If shares are worth 1,000 yen, your benefit is the full 1,000 yen. It does cost the company more, but after looking at our options, we decided that RSU was a more appropriate incentive system than stock options for us as a listed company.
ーThere are some employees that might prefer cash over stock as an incentive. What do you think of that?
Takahashi：First, I should clarify that Mercari uses the term “incentive” to refer to both cash and stock. Cash is something paid to employees based on evaluation of their work and results so far; stock is something paid to employees in expectation of their future work and results. In this round, we decided to grant employees 50% of the total incentive amount in cash and 50% in stock. We chose to do this instead of just giving cash because management wants all employees to commit to the growth of the company (increasing our corporate value) and to our success. From the very beginning, Shintaro (CEO) has always felt strongly that everyone should share rewards when we succeed and pain when we fail. That feeling is the basis of this stock-based incentive system.
ーSo basically, incentives are meant to drive growth of the business and increase in corporate value.
nose：Exactly. Koizumi (COO) often talks about how difficult it is for Mercari to achieve our mission. We can’t reach our goal without the awareness and responsibility of each and every employee.
Takahashi：In other words, every employee needs to have a strong sense of ownership. If you get a cash bonus, you can put the money away and save it, but the value won’t change much. Stock, on the other hand, has the potential to increase in value significantly. That’s why we decided stock was more appropriate than cash for Mercari.
ーSounds like it was more complicated than just choosing between cash and stock. What was the hardest part of implementing this RSU system?
nose：The hardest part was figuring out how to grant RSU to not only our employees in Japan, but those overseas as well. No other company in Japan has granted RSU to the majority of their employees (a total of around 1,000 people), including employees overseas, less than six months after going public. A few other companies in Japan have implemented an RSU system, but most are only for executives and/or certain management levels.
Takahashi：In Japan, it isn’t very common to grant stock to employees, but if you look at the rest of the world, it’s completely different. Since Mercari is aiming to become a global tech company, it seemed like the natural choice, but we ran into a number of issues along the way...
The roadblocks standing in the way of implementation
ーYou were trying to create a global standard system in a country where it was pretty much unheard of. How did you get around all the things standing in your way?
nose：If I started listing all the roadblocks we hit, I could go on forever… But there were two issues we particularly struggled with. The first was working with the US, where stock-based incentive systems are extremely common. The second was having to make last-minute changes right before the launch.
ーFirst, can you tell us about working with the US?
Takahashi：The US is ahead of Japan in terms of stock-based incentive systems, and it’s common for employees to own shares of their company’s stock. Both legislation and simplification of operations are more advanced, and there are even system vendors specializing in stock-based incentive system management tools. Japan, on the other hand, has only just begun to see more stock-based remuneration and incentives in the past few years, and we don’t have nearly enough people specialized in this area. There are many cases where companies don’t have external partners like securities companies and transfer agents sorted out, and there’s an overall lack of experience in the operations required for these systems.
ーCan you give some examples of differences between the US and Japan?
Takahashi：There are things that are totally natural in the US that you can’t do at all in Japan. For example, if you want to open a brokerage account in the US, you can do it online in minutes. But Japan is still stuck in the age of paper forms and name seals, so it takes much more time and effort. Employees with middle names can’t fit their full names in the registration form, employees living alone aren’t home during the day to sign for their mail and have to schedule redelivery...it goes on and on. The whole process is complicated, and we faced setbacks right off the bat. There are all different kinds of rules standing in the way of becoming a global standard.
nose：To give a more technical example, it’s obvious when you think about it, but resolutions made at board of directors’ meetings are different between Japan and the US. When we tried to discuss the plans for the system, the vote got really complicated, and we ended up taking up a lot of the US team members’ time. To the US side, it felt like an unnecessary vote, so they were really frustrated. When we discussed this with the US management, they said, “Who do we have to talk to to get these rules changed? Let’s do it!”, but...that’s basically asking us to change Japan’s Companies Act. (laughs) And this is just one example—throughout the whole process, we realized just how different the standards are for everything in Japan and the US. Of course, it’s not that one is right and one is wrong, but there were a number of times I felt like the rules and the ways of doing things in the US were more reasonable.
ーYou also mentioned having to make last-minute changes right before the launch. What happened?
nose：Well, we actually started thinking about our post-IPO incentive system all the way back in 2016… Around two months ago, we were almost ready to launch a different system, RS (restricted stock). But before we could, there was a last-minute change of direction, and we switched to RSU.
ーWhoa! Two months ago...so the end of October?
nose：Right. It was October 23rd...I’ll never forget that day. (laughs) We were in the last phase before launching the system when John (CBO and US CEO) asked, “Just to check, this new incentive system is RSU, right? Not RSA (restricted stock award, another name for RS)?”
ーYou were talking about two different things the whole time?!
nose：We were. Of course, those of us doing the actual preparation work were on the same page, but John assumed that the “RS” system we were talking about referred to RSU the whole time. I guess that shows how common RSU is in the US. Once he realized it wasn’t RSU, it was almost like the discussion up until then had never happened—he kept saying we have to implement RSU in the US, and couldn’t we implement RSA in Japan and RSU in the US? Honestly, RS is much more common than RSU in Japan, so at the time we were convinced that RS was the better option. So we rushed to break down all the pros and cons of both systems, and once again presented our findings to the executives. We did a lot of research into things like how account processing works when employees leave the company, what the effects would be if we were to change accounting standards in the future, etc. We called specialists and desperately begged them to give us answers within the day. We probably didn’t leave the best impression.
nose：After we presented to the executives, they decided that given all the different factors, RSU might actually be a better choice than RS overall. All of us on the project team were shocked. “We’re seriously changing this now? What about all the time we spent on the RS system already?” But comparing the design plans we laid out for the Mercari system, and the pros and cons of both RS and RSU, it turned out that RSU was better after all. (laughs)
Takahashi：After spending so long discussing an RS system, we had to redo everything with RSU instead. The project had a clear objective of introducing the system before the end of the year, but to do so, it had to be decided upon at the executive meeting on October 30th—the following week. If not, it would be impossible. So we sat down to write up a proposal, and even wrote “Even if we change to RSU now, we can still make it before the end of the year!”
ーThat must have taken some confidence.
nose：With absolutely no evidence to back it up. (laughs) We hadn’t even come up with a schedule or finished adjusting things with the securities company or lawyers yet. But we rushed to rewrite the proposal. We had a retreat for Mercari’s Corporate Division on October 28th, and before the dinner party in the evening, we actually got together in Koizumi’s room at the hotel to give him the proposal in advance. Thankfully, we managed to get it approved at the executive meeting, but it was a really rough week. Of course, we’re telling this story now because we succeeded, but if we hadn’t made it in time...
ーIt was really a last-ditch effort, wasn’t it?
nose：We did some research, but as far as we can tell, the only company in Japan to grant RSU to as many employees as we are, including employees living overseas, is Nomura Holdings. Nomura has a securities company as a member company, and has history, experience, and a global network. Mercari has only been listed on TSE Mothers for half a year, and has no experience with stock-based incentives other than the stock option system we had at the outset. We weren’t sure if we could really get the RSU system up and running by the end of the year. We spoke with other companies that seemed to have effective stock-based incentive systems, even ones other than RSU, and they all told us it took two to three years of preparation...
Takahashi：Of course, we didn’t have anyone with experience in introducing these kinds of systems within the company either. We didn’t even know what the problems were in the first place; all we could do was fumble around and take it one step at a time. Everything we did was totally new to us. When we managed to solve one issue, it would just cause another one. (laughs) Within the team, I called it an overflowing set of drawers—every time we forced one drawer shut, the one below it would pop open. And it kept repeating over and over again as we desperately tried to keep all the drawers closed...
Mercari’s culture and values guiding the team
ーA change in direction at the last minute… Most people would probably freak out and argue the decision, but it sounds like you were able to stay calm and come up with the best plan. How?
nose：I think it’s because the executives weren’t the only ones thinking about what was best for the company—all of us on the project team were determined to create the best incentive system we could. Thanks to that, we were all able to embody Mercari’s values: all members could Be Professional, make (Go) Bold decisions, and work All for One to move the project forward and get things done.
Takahashi：This project was made up of members from various teams, including Incentive & Equity Planning, HR, Accounting, Finance, and Legal. Everyone was specialized in different areas, and everyone was able to figure out what their tasks were and commit to them. During meetings, we didn’t hesitate to speak our minds and point out issues, because we knew it was necessary to achieve our goal, and rather than explaining why something wouldn’t work, we thought about what we could do to make it work. I think this high level of trust played a big role.
ーIt sounds like Mercari’s values were really important to the team. Were there any particularly memorable moments while working on the project?
nose：There was one thing Aoyagi (Merpay CEO) told us...
nose：In the past, Aoyagi worked at Deutsche Bank and as the CFO of GREE. He has quite a lot of knowledge about stock. When we were switching to the RSU system, Aoyagi said, “What’s the purpose behind incentives? I think you’re focusing too much on the idea of giving out incentives based on future work.”
ーWhat did he mean by that?
Takahashi：The project team was working based on the thought that giving stock was paying employees for their future results. Instead of giving something that reflects the current results (the stock price), if we give (the rights to) stock, employees will work to boost the value of that stock. That was what we thought an incentive was supposed to be. But we were so focused on that idea that everything from the system design to the procedures were ending up skewed in that direction. When Aoyagi asked us what we thought incentives for the future really were, I was taken aback.
nose：Me too. It was like I snapped out of it. After I heard Aoyagi’s words, I cleared my mind of everything I had been thinking until then and started over. We started using the phrase “let’s look at it from a bird’s-eye view” a lot in the team. (laughs)
Takahashi：What is an incentive? What are we trying to achieve with them? What kind of message from the executives are we sending? These seem like basic concepts, but it was really meaningful to sit down and discuss them again. We didn’t change the main idea of granting stock incentives, but we made sure we were all on the same page and fully understood what we were doing.
ーLast question: How would you define success for this incentive system? What actions and mindset are you hoping to see from Mercari employees?
Takahashi：It’s hard to put it into words. I think right now, Mercari employees tend to focus on the immediate results they can see right in front of them. If everyone is able to shift their attention to mid- to long-term results and responsibilities for Mercari as a whole, I think that would be a sign the incentive system is a success.
nose：I would call it a success when everyone is looking at the big picture and focusing on increasing Mercari’s corporate value, rather than getting caught up in the daily ups and downs of the stock price. This could mean the success of Merpay, which is launching soon, or the success of Mercari US. I want to be able to ask all Mercari employees whether they feel as if they’re committed to the growth of the Mercari Group in the long term and have every single person answer yes. That’s the goal of this incentive system.
nose is a graduate of UCLA in the US and Kyoto University. In 2009, she joined Deloitte Tohmatsu Consulting Co., Ltd. (now LLC), where she was in charge of consulting for leading Japanese car manufacturers in Thailand and Japan. Later, she joined Ernst & Young Tax Co. and worked in transfer pricing consulting. In April 2016, she joined Mercari, where she was in charge of international tax and accounting, the founding of Mercari UK, and more. She is currently a member of Incentive & Equity Planning, which handles stock-related work such as designing and running the stock incentive system as well as the shareholders’ meeting.
After graduating from university, Hiroyuki Takahashi joined Persol Career Co., Ltd., where he was involved in recruiting. He began his HR career at mixi, Inc., and mainly handled recruiting for engineers. Following this, he worked as an HR/payroll manager at COLOPL, Inc., where he gained experience in both new graduate and mid-career recruiting, as well as various HR tasks such as system planning and payroll. He joined Mercari in 2016.