Hit the Rich and Save the Economy

There's no argument that all limits have been breached and greed has overcome top executives. No one can deny that a monthly salary of one million shekels is insane and unjustified. Nobody is worth NIS 33,000 a day.

Neither can there be any argument that this reality must be changed, because it reflects a manifest breakdown of the market. A truly competitive market would never reach sums like this. Perhaps there is an executive, or even two, who merit this kind of excessive wage, but we don't have dozens of such geniuses, and certainly not hundreds.

Inflated salaries at the top have a disastrous social effect. When gaps in earnings are so vast, society is torn apart and its potency is diminished - and the motivation to work sinks. It's hard to see the CEO making in one month what a manual laborer earns in ten years. All of this, however, does not mean that the bill proposed by Knesset members Shelly Yachimovich and Haim Katz is worthy of support. It is a particularly bad bill, pure populism, and could cause severe damage to the economy.

There isn't another country in the world, except North Korea and Cuba, that puts a cap on salaries, and there's a good reason for this; even though many other countries have a similar problem of executives taking home enormous salaries, they don't have legislators dragging the level of public discourse to so low a level just to get their names into the headlines. Across the entire globe, there is nobody who can determine exactly what a CEO should earn. Why should the maximal salary be precisely 50 times the minimum? Perhaps it should be 10 times greater, or 100 times? In the Soviet Union they did know what everyone should earn - in the end everyone was dirt poor, unless they were Communist Party members, and the method that Yachimovich favors collapsed.

The moment a CEO's salary is set by politicians we will no longer be able to compete and improve. Company owners won't be able to attract a successful CEO from another company - after all, he's already earning the maximum, say NIS 200,000 a month. What will the proprietors of a small bank do if they want to lure the CEO of a bigger bank? And how will the emigration of top executives be prevented?

Nevertheless, something can be done about the problem. First it must be understood that gigantic wage packets were the method invented by owners of controlling shares in public corporations who wanted to rob the other shareholders. They made themselves chairmen of the board, and so that they could take millions for themselves, they had to pay similar sums to their salaried CEO's. That is how the norm of crazy salaries at the top evolved.

Therefore, the Securities Authority should bar controlling shareholders in public companies from taking more than nominal sums as salaries. Inflated salaries come at the expense of distribution of a fair dividend to shareholders.

The second stage in solving the problem is to build up independent and courageous boards of directors in public companies, comprised of people who do not depend on the controlling shareholders. The appointment of associates, relatives, buddies or just cowards should be prohibited, and only gutsy professionals who are capable of standing up to the owners should be allowed to serve on boards. Because if they do not do their job properly and divide up millions any which way, the law should make it possible to sue them for negligence and they would have to compensate shareholders out of their own pockets.

Another problem in the executive earnings sphere is the annual bonus, which often leads to the taking of enormous risks. This is because a bonus paid in a good year (2007, for example) does not become a fine in a bad year (like, say, 2009). The bonus system must therefore be altered, and based on long-term results.

The problem of inflated salaries also springs from the excessive power enjoyed by the 20 families that control the big conglomerates. Their potency in the marketplace is huge, so they can pay huge salaries without sustaining too much damage to their profits. They should be dealt with by the method already practiced in the United States: enabling shareholders to vote by mail at general meetings, taxing dividends that subsidiaries pay their parent companies and a ban on the setting off of profits between component companies within conglomerates.

That way, it won't be worthwhile any longer to hang on to conglomerates. They will gradually fade away, economic power will be decentralized and salaries will subside to a normal level.

There are things that can and should be done. There are solutions. But Yachimovich and Katz are not looking for genuine solutions. They are looking for headlines, of which they have already received a great deal.