Tel Aviv Stock Exchange
The Tel Aviv Stock Exchange. Photo by Bloomberg
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Senior management pay at publicly traded companies has suffered bitter criticism over the past year, but CEO compensation actually fell in 2011 by 12% to 23% from the year before, according to the accounting firm PwC Israel.

PwC found that annual basic CEO salaries rose 9% to NIS 2.5 million on average for companies on the Tel Aviv Stock Exchange's benchmark TA-100 index. But the other two major pay components, annual bonuses and stock options, declined sharply. Among companies on the blue-chip TA-25 index, the average CEO bonus represented 0.3% of net income, while on the TA-100 it represented 1.3%.

The PwC study reveals that in 2011 basic salary accounted for about 60% of compensation costs for board chairmen and CEOs, bonuses accounted for 22% and options for 18%. Bonuses in 2011 fell due to lower corporate earnings, so the proportion received in salary was greater.

PwC's Heelee Kriesler notes that CEOs at companies on the TA-25 received the largest salaries and annual compensation, followed by CEOs at firms on the TA-Finance index, which includes banks and large insurance companies. Kriesler says this reflects a global pattern: Managers' compensation is largely related to a company's size.

Meanwhile, among publicly-listed companies, CEOs' typical annual bonuses are equivalent to between 11.7 and 12.9 of their monthly salaries. In other words, bonuses double a CEO's pay.

But CEOs heading companies on the TA-Biomed index are a notable exception, with bonuses averaging just 3.6 monthly salaries. This is because most biomed companies on the TASE are still in their development stages and losing money, so there's no mechanism for a profit-based bonus.

According to Kriesler, CEO bonuses don't always correlate to their companies' net income, at least not in the financial or real estate sectors, where managerial performance is measured by return on capital. This is especially true for banks, where return on capital is the main measure of management's success.

Amendment 16 lowers top pay

Kriesler says the main reason for the drop in senior management pay last year was the implementation of Amendment 16 to the Companies Law.

For compensation agreements, the amendwed law requires approval from a majority of shareholders unassociated with controlling shareholders. Thus, at many companies, senior management's compensation has been capped, or even reduced.

"The economic crisis can be expected to affect trends in senior management pay in 2012, too," says Kriesler, adding that the expected passage of Amendment 20 to the Companies Law will spur another reduction in executive compensation. According to Amendment 20, corporate compensation policies will require a ceiling on each component of the package.

Under Amendment 20, annual bonuses will be based on measurable parameters, and the overall compensation package for top executives will need shareholder approval. In the coming years, Amendment 20 should make managers' compensation plans more structured and transparent, and linked to their companies' short- and long-term performance.

Currently, many CEO bonuses seem to be arbitrary. On the TA-100 index, 60% of firms don't have any cap on annual bonuses for CEOs, and bonuses at 60% of companies on the TA RealEstate-15 and TA-Biomed indexes are determined by judgment call.

Kriesler says the more methodical a company's compensation packages, the more consistency between a CEO's pay and pay to other senior executives. At companies granting bonuses using general discretion, compensation plans for senior managers vary.

Kriesler also found that the most common mechanism for equity compensation in 2011 was stock options. The use of restricted shares was prevalent mainly at companies on the TA-25, TA-Finance and TA RealEstate-15 indexes. On the TA-Biomed index, it's regular practice for companies to give their workers stock options too.