MK Shelly Yachimovich has proposed a bill that would cap executive salaries at public companies. Sunday, the Ministerial Committee on Legislation is scheduled to vote on it. While TheMarker has objected to similar proposals in the past, the issue is crucial - it's a symptom of many greater ills in the Israeli economy. Here's why.
1. The symptom
The Bank of Israel has been warning that if legislators and regulators ignore the danger posed by the economy's leading families, it could weaken or neutralize the government's ability to impose economic policy. The inflated salaries of top executives at some of Israel's public companies are one of many symptoms of our economy's centralization - the massive economic power concentrated in the hands of a few tightly connected individuals with interconnected holdings and joint interests creates conditions that boost the salaries of a handful of their associates while leaving the regulators powerless.
2. Marionette board members
First to be neutralized were the corporate boards. The high centralization turns most board members into marionettes. When most of the large companies are controlled by a single group of people, the board members understand that if they want to make a living in the business world, they need to see to these peoples' interests. A board member has one single opportunity to take a stance contrary to that of the controlling shareholders - afterward, he'll be a marked man, as far as the market is concerned.
3. Fighting competition
The massive economic power of these families and tycoons enables them to build monopolies and cartels, which harm not only consumers but also productivity, innovation and excellence. The job of many of the well-paid executives is to preserve the current state of the market. The controlling shareholders know they're better off paying million-dollar annual salaries than facing a competitive market. On Wall Street, the compensation system pushed managers to take massive risks, while in Israel it's encouraging aggressive behavior against competition and government regulation designed to strengthen the market.
4. Paid for connections
The high salaries affect not only CEOs, but also regulators - the people who should be making the market fair and competitive. They see the money they'll be getting if they can get one of these jobs for themselves, and realize it's not in their interest to fight with the tycoons.
Two phenomena are going on here: First, many of the bourse's best-paid executives are former regulators and Finance Ministry officials - people who know how to pull strings in the halls of power. Second, almost all the former regulators and officials in top positions in the business sector are working at companies whose profits depend on government decisions.
If former Finance Ministry officials are such talented managers that they deserve these millions of dollars, why aren't they leading high-tech companies, exporters or international corporations? Teva, Iscar, Check Point - Israel's most successful companies - don't have any former government officials. Could it be that their real advantage is their government connections or their membership in the club of the oligarchs' "subjects"?
5. Neutralizing the institutionals
The economy's high centralization means that most of the institutional investors, which are managing trillions of shekels of the public's assets, are controlled by the oligarchy, directly or indirectly. Their managers cannot represent the interests of their customers - and fight the executives' inflated salaries - since they themselves benefit from this kind of compensation. When the boards of directors and the institutional investors have no power, there's no real oversight of executive salaries at public companies.
6. Bypassing the dividend
The sky-high salaries aren't found only in local monopolies; they appear in sectors with competition, too. Here, the phenomenon is slightly different - the executives generally happen to be these companies' controlling shareholders. A high salary is a way to get money without having to share with the other stockholders, a way of bypassing dividends.
7. Competition for managers
Other companies pay high executive salaries, too - companies in competitive markets, with independent boards, and whose controlling shareholders aren't trying to milk them. But they're competing for executives who can get fantastic compensation elsewhere, for the aforementioned reasons.
8. Growth only at the top?
The beneficiaries of these wonderful salaries justify them by citing economic growth and the management's achievements. But if these are the reasons, why is it that only the very top echelon is enjoying such generous compensation, while business sector salaries as a whole have barely budged during the last decade? Is the success of these companies dependent entirely on the CEO?
9. The opening salvo
Israel's oligarchy is leading the fight against the bill to cap salaries. In theory, it should support such a proposal - it would leave the owners a larger piece of the cake. But it's these inflated salaries that enable the oligarchy to increase its haul, at the expense of consumers, taxpayers and minority shareholders: It's the tool to get the executives to cooperate in limiting competition.
In short, this is only one symptom of the Israeli economy's many illnesses and market failures. It's not an important macro-economic issue, but its causes are. If these salaries reflected a fair, competitive market, creation of value for consumers and shareholders, and breakthroughs into international markets, then maybe there would not be any reason to intervene. But that's far from the situation here.
The current formulation of Yachimovich's bill does not get to the root of the problem, and could create additional distortions. That's why TheMarker has objected to previous initiatives to interfere with salaries. But the past few years have shown the government, the regulators and the public are indifferent to the above phenomena.
Yachimovich's bill should be only the opening salvo in the greater battle to increase productivity and competition, to reform, reduce corruption and strengthen democracy. Therefore, in their vote on the bill on Sunday, the members of the Ministerial Committee for Legislation need to give their support, and make sure the bill addresses the root causes - decreasing concentration, reducing the power of the economy's strongest families, separating financial companies from other kinds of concerns, establishing independent boards and increasing competition.
Then, executives will start to earn salaries that reflect their actual worth, and regulation of this issue in particular will no longer be needed.
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