Four years after MK Shelly Yacimovich (Labor) introduced a bill limiting management compensation at publicly traded companies, executive pay is again in the spotlight. The Finance Ministry’s commissioner for capital markets, insurance and savings is imposing a new set of restrictions on managers at insurance companies. There’s no cause for alarm: It won’t drive them out of the country to take up positions paying tens of millions of dollars at huge multinational companies just waiting for a talented Israeli executive to show up. We can all breathe easier: These executives will be staying put.
Yacimovich’s original bill called for restricting managerial pay at publicly traded companies to 50 times that of their lowest-paid employee. It was meant to reduce inequality within companies and create a link between the paychecks received by senior management and their rank-and-file employees. The bill nearly passed in the cabinet’s legislative committee, but Prime Minister Benjamin Netanyahu managed to torpedo it at the last moment and bury the proposal in a committee headed by then-Justice Minister Yaakov Neeman. Trusty as his surname implies (Neeman means "loyal" in Hebrew), the minister cooked up a formula to make life slightly more difficult – but not overly so – for top managers to get their exorbitant pay packages approved. Critically, it didn’t set any ceilings for executive compensation. The Yacimovich threat was removed, for the meantime.
Amendment 20 to the Companies Law, which sets out the executive compensation approval process based on the recommendations of Neeman’s committee, took force last year. The amendment required publicly traded companies to come up with compensation policy for top management by September 12, 2013. Now the question being put to the test is whether the amendment succeeded in stemming the rapid inflation in executive pay, particularly when it comes to it lacking any connection with the company’s performance and the realities of doing business in Israel.
Yacimovich’s proposal was declared delusional at the time, but global events worked out in her favor. The biggest crisis to hit the international financial system in 80 years led to the collapse of some of the world’s largest banks and insurance companies. The crisis exposed their deranged risk taking and the incentive behind their managers’ hunger for risk: bonuses. Suddenly the idea of restricting executive pay didn’t seem so outlandish and communist.
Despite the heavy price exacted by the global crisis and the unacceptable link it revealed between excessive pay and exaggerated risk taking, most of the world didn’t perform the courageous deed of limiting executive pay. The pay system in American banking, for instance, was left untouched except for the introduction of some minor restrictions meant to pacify or silence the public for a while. But European banks have already seen changes in the way executives are compensated, and a European Union directive linked managers’ bonuses to their annual salaries.
Amendment 20 applies to all public companies in Israel, but doesn’t provide a real solution to the problem. Most boards adopted compensation policies that perpetuate the existing situation, and most companies set their pay ceilings higher than the accepted pay levels prior to the formulation of the new policy. This set the stage for the supervisors of the financial establishment to enter the picture.
It all began with Bank of Israel Banks Supervisor David Zaken, who released instructions and restrictions over bankers’ pay. Last week he was joined by the capital markets commissioner, Dorit Salinger. The two are demanding a link between regular pay and bonuses, such that bonuses don’t exceed 100% of salary, or 200% in “extraordinary cases,” just as in the European Union; that bonuses be paid in installments over several years rather than immediately in the same year; and that the bonuses will be returned if the organization’s risk level fails to adequately reflect the risk levels of the people whose savings are being handled. Under another directive, a manager’s severance grant must be determined in advance and not at the time of his departure when it could swell for no reason.
We’ll need to wait several years to see if these measures have any effect restricting managerial pay. They were worded in a way that should reduce risk taking without taking away the ability to earn millions of shekels. We will probably still see clever managers succeeding in maneuvering between all the directives and finding ways to take home enormous sums.
But why does excessive executive pay at financial institutions arouse so much public anger, when nobody seems to mind when the founder of a startup takes home the same pay? There are at least three reasons:
1. The feeling that the financial establishment isn’t giving us a fair shake. We see this in the exorbitant management fees for administering our pension funds and cut them down by a quarter or third. We feel this in the steep interest charged on a loan compared to the miserable interest earned on our deposits. And we see this in the creative and absurd bank fees on strange services such as “guarding fees” on securities – as if they’re really posting a security guard to watch over our money.
2. The essence of financial activity: brokerage. There is no real creation of value, only a meeting place for lenders and borrowers. We hate brokers. We need them, but we hate them all the same. In many sectors such as tourism or buying books, clothes and music, the traditional brokers have become redundant since the Internet took over – but not in finance. We are still completely dependent on our bank and insurance company, and haven’t yet found the way to manage without them. Why shouldn’t we hate them? After all, a bank is an institution that will only give you money if you prove you don’t need it. The standard bank and insurance contracts ensure that you’ll never read them, except in a legal case when it turns out they’re trying to shake us off.
3. The public exposure of financial deals. Slogans can be bandied about the free market and private businesses and property rights and all that jazz, but banks and insurance companies aren’t really a free market and aren’t private businesses at all. The proof can be seen when they run into trouble, and then the ones saving them from collapse and bankruptcy are us, the taxpayers. We saw this in 1983 when Israel’s bank stocks crashed, and five years ago with the financial systems of the United States and Europe and the nationalization or bailout of some of the world’s most distinguished financial institutions, from Citibank to the Royal Bank of Scotland. What other industry attributes all the opportunity to management and the entire risk to taxpayers? What other industry is effectively insured by the government against collapse?
So even if we do see a certain curb on the compensation given to top executives at banks and insurance companies, it still won’t convince us they deserve it. Not in the existing format. Not when the level of competition over small customers, households and small businesses is so pathetic. Not when management fees eat into a quarter or third of our pensions. Not when the CEO pulls down a salary five or 10 times larger than a person who saves for his pension all his life. Not when the deal is for taxpayers to rescue financial institutions from their managers’ shenanigans.
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