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Israeli CEOs earned more as profits shrank, says PwC paper
By Yuval Maoz

While investors have had to come to terms with the decimation of profits at some of Tel Aviv's biggest companies, that can't be said of the top managers.

In 2008 the combined profit of the companies listed on the TA-25 index, which tracks the biggest 25 listed companies by market capitalization, dropped by 40% from the year before. That's sobering stuff.
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Yet the average salaries of these companies' CEOs rose by about 30%, to NIS 7.9 million in 2008 (in terms of wage cost), according to a study by the remuneration department at PricewaterhouseCoopers Kesselman & Kesselman.

Moving onto the TA-100 index, PwC found that 2008 salary levels among CEOs remained unchanged at NIS 4 million on average.

Things were different in the financial sector. Looking at the companies on the Finance-15 index, we find an average CEO salary drop of 12% to NIS 4.7 million.

The lowest average CEO salary was in the Real Estate-15 index, where the average last year was NIS 2.8 million, again in terms of wage cost. That's down 30% from 2007.

The numbers above refer to the chief executives' entire remuneration, including accounting charges for stock options (at the grant date, not by fair value). During 2008, most stock options were far outside the money.

Other aspects of PwC's findings are just as eyebrow-raising. The consultancy found that annual bonuses were granted in retrospect at 70% of the companies on the TA-100 index. They were not based on goals set in advance. In other words, the board of directors decided on a whim, not based on clear criteria.

Only 30% of the companies on the TA-100 rewarded their executives based on clear, quantitative criteria. In half the cases, the main criterion when calculating bonuses was net profit.

Among the TA-100 companies, the average CEO's bonus was 1% of net profit. Veeps at these companies averaged 0.3% of net profit as annual bonuses.

Among the Finance-15 companies, CEOs' average annual bonus was 0.4% of net profit, a figure that climbed to 0.8% on average for companies listed on the Real Estate-15.

The study also found that the fixed component of executive remuneration is much higher than the norm elsewhere in the world. Among the companies on the TA-100, base salary comprises between 43% to 57% of annual remuneration. Among the finance and real estate companies, base salary comprises 64% to 67% of annual pay. The variable part of pay, including bonuses and stock options and so on, comprises 24% to 52% of CEO pay.

The upshot of this high fixed component is that - again in contrast to other places - there is little correlation between corporate performance, in either the short or long run, and remuneration in Israel.

Elsewhere, the norm is for about a third of CEO remuneration to be base salary. The rest depends on how well the company actually does, whether on the stock market, profitwise and so on. Not here. Come high water or low, most of the CEO's pay is assured.

PwC also found that most local companies give stock options to the talent, at roughly the area of the share price when giving the options. In 60% of cases, the exercise price was based on the share price during the month before the options were given. Option exercise was not commonly linked to performance.

The bottom line, says PwC Kesselman & Kesselman, is that Israel would do well to rethink its mechanisms of rewarding executives and workers.
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