The Israel Securities Authority is putting out a new directive that requires listed companies to disclose more details about their procedures of approving executive pay.

The issue of executive pay turned red-hot when the market learned just how much the topmost echelons at banks Hapoalim and Discount were getting for the year 2005. Bank Discount has withdrawn its executive remuneration program, while Bank Hapoalim is still discussing the issues at stake.

Meanwhile, though, the ISA plenum has approved the draft directive, which will now be published for the public's comment.

The directive targets mainly the officers who approve executive pay at the companies, namely the  board of directors, and the audit committee. The directive requires them to maximal disclosure of the approval process, and to describe their reasons.

The companies will have to explain what contribution the recipient of the wage makes to the company, and how the pay is designed to reflect performance.

The ISA provides several examples of prevalent pay practices that it aims to abolish.

One striking example is that of a new CEO, who is entitled to a percent of the company's profit, if profit increased by more than 5% against the previous year. Say that during the three years before his arrival, profit at the company increased by an average of 7% a year, and is expected to increase by 7% in the current year as well.

In that case, a bonus for the new CEO would not be a reward for work well done; just an automatic bonus when all he did was preserve what had been there already. The company should disclose such things, the ISA says.

Another point that the ISA attacks is the habit at companies for officers to approve pay for each other.

Its main demands are:

a. Remuneration should be performance-linked, to a company's results and fulfillment of goals. The management must describe the calculation formula precisely, including the indices used in calculation. The company must cite how much it expects the formula to produce, ie how much it expects to pay, based on the company's last financial statement. The company must also provide a sensitivity analysis of how the formula's results would look in the future.

The company must also explain what the manager's contribution is, and how the pay reflects said contribution.

2. If the talent is to be rewarded using securities, proper disclosure is mandatory, including citation of the grant, vesting and expiry dates. No back-dating scandals for the ISA.

3. Full disclosure of severance terms (shadow of Victor Medina's retirement terms from Bank Mizrahi-Tefahot, and the bank's tardy announcement about them).

4. A list of everybody who approved the executive pay.

5. Reasons why the pay was set where it was, and how it was set.

6. If there were any nay-sayers, the ISA wants to know who they were, and why.