Shuki Oren
Shuki Oren. Photo by Tomer Appelbaum
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Executive salaries will be a function of average wages at each company, it seems. A committee appointed to shape government policy on executive wages and chaired by Justice Minister Yaakov Neeman is expected to file its report within weeks, and that is expected to be its bottom line.

The National Economic Council noted that linking executive salaries to the average wage at each company could create an incentive to artificially increase the average wage, perhaps by moving low-cost operations such as manufacturing abroad, or by firing the lowest-paid employees and rehiring them through contractors, so they would no longer be considered company employees.

In response, the committee decided to include subcontractors' salaries in the average and said it was willing to take the risk that companies would shift some operations abroad. However, the panel also decided that its recommendations be attached as an amendment to the relevant law, rather than being part of the law itself, to facilitate further changes in the event the reforms had an adverse effect.

The committee is also changing its recommendations on how salary policy is set. Its interim recommendations said that high salaries were to be based on long-term results and concrete measures of risk. The final recommendations will include room for less measurable factors, such as improvements to working conditions or the company's reputation, although these will play only a minor role in determining salary.

In addition, the company's long-term results will be compared to the market's performance, in order to reward executives whose companies outperform. This means executives will not be able to receive excess compensation when all the companies in that sector do well. Given that most companies do not outperform their sector over time, this measure may greatly reduce executive compensation.

The committee rejected some of the National Economic Council's recommendations, including a call for having executive salaries set by a body other than the company's board. The council had argued that boards don't have the necessary knowledge to determine salaries and that their relationship with the executives and the controlling shareholders constitute a conflict of interest. The council recommended that external companies be charged with setting wage policy, similar to rating companies, and that the board would choose which company's model to adopt.

The committee argued that such a model was not in use anywhere in the world, and that the external companies would also face a conflict of interest because, like rating companies, they would be paid by the very executives whose compensation they were setting. However, the committee did decide to stick with its initial recommendation to strengthen boards by giving more power to external board members and to control committees, and to increase public involvement and oversight over executive salaries. As part of this, a regulatory body such as the Bank of Israel or the Israel Securities Authority would publish a periodic report on executive salary trends.