An annual income of 3 million shekels ($860,000) was what it took to enter Israel’s pantheon of wealth in 2011 – meaning people whose earnings put them in the top 0.1%.
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Hundreds of top-level executives populate this group, but almost all of them from just three business sectors: finance (banking and insurance), telecommunications (cellular operators) and high technology. At the highest reaches of this 0.1%, a single representative can also be found from industry (apparently Coca-Cola) and one from the healthcare industry. The latter obviously refers to Hadassah University Hospital where private medicine has turned doctors into millionaires while pushing the hospital to the brink of bankruptcy.
Those are the findings of Galit Ben Naim, a Finance Ministry economist, who analyzed the top 0.1% of income earners for the Israeli Tax Quarterly. The average monthly income among this elite group was 190,000 shekels ($54,000) -- and most of them had income from other sources, such as capital gains.
Israel’s top 0.1% loves to invest abroad – 15% of their capital income came from overseas – but they don’t believe in real estate. Their total income from rent amounted to just 1% and only 13% of them reported any rental income despite 29% owning homes for investment purposes.
The question is what happened with the other 16%. One possibility is that the richest Israelis are very modest and only invest in homes so small that rental income doesn’t reach the threshold for reporting to the tax authorities. It could also be that, like most Israelis, they don’t report rental income at all – although these are people whose incomes are in the leagues that require them to file annual tax returns.
Another interesting tidbit of information is the group’s low mobility, with 63% of those included in the top 0.1% in 2010 maintaining their exalted status in 2011. This might partly be explained in terms of family. Parents whose 25- to 40-year-old children numbered among the top 0.1% earned an average of 38,000 shekels a month, 3.7 times the average for all parents of children in this age group. The wealthiest of these parents belonged to the financial sector where they averaged 45,000 shekels a month themselves – although their children surpassed them with earnings averaging nearly 200,000 shekels a month.
High-tech proves itself
The financial sector dominates the field of the highest paid Israelis. One company alone (apparently Bank Hapoalim) accounted for fully 10% of the sector’s employees among the top 0.1%. Finance executives are also the best paid among the top 0.1%, averaging 230,000 shekels a month, compared with between 205,000 shekels to 210,000 shekels for those in telecom and high-tech. They also zealously maintained their place at the top: Two thirds of bankers in the top 0.1% in 2010 not only remained there in 2011, but their average pay jumped 36% even though banking profits rose by only 3.7%. This seems to indicate that any connection between pay and performance when it comes to the top 0.1% is purely coincidental.
The average pay of bankers among the top 0.1% in 2011, including newcomers into this bracket, rose by 3%, which was close to the 3.7% increase in bank profits. The telecom industry reflected a similar correlation. In 2011 the industry was shaken up by reforms that led to the competitors and falling rates, which resulted in profits plunging 25%. The pay for senior management in the industry numbering among the top 0.1% accordingly fell by 27%.
It might seem, then, that there’s a strong link between pay and performance, but that’s only until we examine the overall picture. The difference between the performances of the relevant companies is tremendous.
While cellular companies saw profits drop 25% to an average of 600 million shekels in 2011, financial institutions posted average earnings of 400 million shekels that year. Meanwhile, the 27 technology concerns that managed to place their top managers in the top 0.1% club increased their profits by 48% in 2011 to reach an average of 1.2 billion shekels per company.
No link between profit and pay
So the average profits earned by the high-tech companies were twice those of the cellular companies and triple the level reached by the banks, but their top managers still earned about the same as those from the cellular companies and less than those at the banks. It bears mentioning that high-tech managers steered their companies through the turbulent sea of global competition and met with dazzling success. Cellular industry executives, on the other hand, enjoyed a captive, uncompetitive market for years. As soon as it was opened to competition, profits tanked – along with their pay. Bank executives, obviously, enjoyed and still enjoy a captive uncompetitive market where continued moderate growth in profitability demands little in the way of managerial talent.
Furthermore, high-tech executives have achieved breakthroughs in their companies’ performance despite fierce global competition while also maintaining their companies’ inner strength in terms of labor relations. The pay for high-tech managers belonging to the 0.1% club in 2011 was just four times the average pay in their companies – compared with a ratio of nine in the financial sector and 22 among cellular operators.
By any measure, the scales of managerial abilities are heavily weighted in favor of high-tech managers – but heavens to Betsy, they earn less. Does this mean that the top managers at high-tech companies are chumps working for inadequate pay? That doesn’t seem likely, considering that high-tech managers in many cases have their pick of jobs in the global market for managers. Unlike someone running an Israeli bank or cell phone operator, someone who can run a global tech company from Tel Aviv or Herzliya Pituach can probably run one from Silicon Valley or from Berlin.
The lesson we should be learning from the pay of the top 0.1% isn’t that technology executives are underpaid suckers. Rather, it is that the compensation paid to the people running Israel’s large monopolies – the insurance, banking and telecoms industries among others – is bloated. It is a function of personal connections, controlling shareholders buying the loyalty of their managers and servile boards neglecting the interest of shareholders and the public.