The state should not be involved in determining executive pay at publicly traded companies, according to recommendations that will be presented for approval to the cabinet on Sunday.

The recommendations were prepared by a committee, headed by Justice Minister Yaakov Neeman, that was appointed last March to investigate the matter. Should the cabinet approve the recommendations, the next stage would be drafting legislation.

The committee members will point out at Sunday's meeting that in other countries, the state has no role in determining compensation for senior executives. They will also note that state interference in the matter could cause greater harm than good.

The committe was set up after Shelly Yachimovich (Labor ) and Haim Katz (Likud ) proposed legislation that would have capped salaries of senior executives at public companies. The committee's members are Finance Minister Yuval Steinitz, National Economic Council chairman Eugene Kandel and two former Labor Party ministers, Isaac Herzog and Benjamin Ben-Eliezer.

The committee is expected to tell the cabinet that the best way to prevent excessive executive compensation is to enhance the independence and oversight powers of corporate boards of directors, improve the system of pay authorization and ensure that public companies adopt orderly wage structures.

The committee will recommend, however, that corporate policy relate to criteria that would be spelled out in legislation and that it include salary caps and other provisions the law would provide. It also makes an exception in the case of companies that are part of a pyramid-type corporate group, where the controlling shareholder may have more power and where the dynamics are different.

The committee will recommend that a mechanism be put in place that ensures that wage structures in all public companies serve the interests of the companies' investors as a whole, promoting long-term returns that are consistent with corporate policy.

Publicly-traded companies should be required to adopt compensation policies that further long-term corporate policies and goals as well as the company's business plan, while also taking into account the risks the company faces, according to the committee's recommendations.

The committee has proposed that compensation at each public company be determined by the board of directors and be contingent on prior approval by the control committees. The overall policy should also be submitted for review to a general shareholder meeting and receive approval by a special majority. Absent this approval, salaries would have to resubmitted to the board for approval, and its members would have the final say on the matter.

Tycoons to put up a fight

Under extenuating circumstances, companies would be entitled to make exceptions to their compensation policies, but only with the approval of the control committee, the board of directors and a general meeting of shareholders.

The Neeman recommendations are based on the assumption that in publicly traded companies, there is typically no incentive to pay office holders compensation beyond what they entitled to. As a result, the final decision should be left to the board of directors, which has the expertise and knowledge to make such decisions.

The situation is different, however, when a company is part of a pyramid-type corporate business group, according to the committee's recommendations, in which case the controlling shareholder's interest is not the same. The reason is that there is greater incentive under these circumstances for the controlling shareholder to pay excessive salaries as a way of increasing the dependence of executives on the shareholder, to the disadvantage of other shareholders.

Among these companies, the Neeman committee proposes that salaries be approved by public shareholders representing a majority of shares not held by the controlling shareholder or other parties with a particular personal interest.

The cabinet is expected to propose legislation based on the Neeman committee recommendations before the Knesset's Passover recess at the end of March. After a first reading, the legislation will be considered by the Finance Committee, which is expected to come under heavy pressure from lobbyists and wealthy business people to water down the provisions.