Yaakov Neeman - Michal Fattal
Yaacov Neeman. Photo by Michal Fattal
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Two years after a committee began discussing executive pay at publicly traded companies and 20 months after its deadline, the final report is in: Minority shareholders get veto power over pay practices at pyramidal business groups.

The bill is based on the final recommendations of the committee, headed by Justice Minister Yaakov Neeman.

The committee also recommended bolstering the independence of boards of directors and audit committees, and improvements to corporate governance at public companies.

The bill distinguishes between "regular companies" and companies that are part of pyramidal business groups. At the regular ones, if minority shareholders object to executive pay packages, the board must reopen the issue, but it will still be able to override the objections. At a company in a pyramid, the minority shareholders get veto power.

The logic behind the distinction is a fundamental conflict of interest at pyramidal groups.

The controlling shareholder at the top of the heap controls all the companies below. He may have only a tiny equity stake in the companies at the bottom, but he still calls the shots - which may include exorbitant pay to the executives. As a minority shareholder himself, he won't be substantially impairing his returns.

But while it might be in his best interest to lavish lucre on the executives, that may not be in the best interest of the company and its other shareholders.

Put otherwise, the top controlling shareholder can buy the loyalty of executives throughout his group without paying a price; the other shareholders pay the price. He hopes to gain the executives' loyalty to the pyramid, not to the specific companies employing them.

Therefore, the Neeman Committee decided, it is particularly important for minority shareholders to receive a voice at pyramidal groups.

The committee also demands that all public companies craft a policy on wages that links pay with long-term performance.

Importantly, a company's performance will be measured against market and risk benchmarks. Meaning, if a company made a load of money just because the market was bullish (whether the stock market or the market for its products ), that's not grounds for bonuses.

The policy will also have to set ceilings on bonuses and retirement severance pay. Moreover, companies must lock in a mechanism to get back money already paid out if the figures prove wrong.

And companies may not set the bar too high: Executive pay will have to be relative to the company's average wage. An innovation in the committee's final report that wasn't in a draft a year ago includes temps' pay in the calculation. Temps typically get paid less than payroll workers. Folding temps into the requirement is meant to prevent companies from firing workers at the bottom of the ladder and replacing them with cheaper subcontracted workers, just to jack up the "average wage" and raise the CEO's pay.

That said, the committee never states what it feels the maximum gap between average pay and top pay should be.

Neeman had said throughout that he opposes caps on executive pay, but that the public should receive tools to judge whether an executive pay package is appropriate, and tools to oppose it at shareholder meetings. Neeman also expressed opposition to "penalizing" high-earning executives through tax.

Critics complained that his positions were toothless. Even the stronger final version of the committee's recommendations fails to reflect the principle that guided the MKs behind the original proposals to curb executive pay - Shelly Yachimovich (Labor ) and Haim Katz (Likud ). They wanted to cap top pay at 50 times a company's lowest pay. As said, Neeman refuses to limit executive pay in any way, just to give shareholders tools to rattle the executive cage.