Ben-Bassat: Want to Change CEO Pay? Tear Down the Pyramids

Former director general of the Finance Ministry says recommendations of the Neeman committee on executive wages and corporate governance are inadequate.

Prof. Avraham Ben-Bassat, a former director general of the Finance Ministry, said the recommendations of the Neeman committee on executive wages and corporate governance are inadequate, since the pyramidal ownership structure of large concerns is a large part of what allows them to pay excessive wages.

He said he did not see how the committee's recommendations would lead to any real changes in executive compensation. He suggested raising income tax rates for the very highest wage earners and placing a ceiling on the level of wages that could be written off for tax purposes.

Avi Ben-Bassat - Emil Salman
Emil Salman

"The pyramidal structure of corporations creates intense economic concentration, and we must make policy that will significantly reduce the existence of corporate pyramids in the Israeli economy. If we do that, it will contribute to limiting the salaries of executives at those companies," said Ben-Bassat in his testimony before the Neeman committee. Justice Minister Yaakov Neeman headed the committee tasked to examine the issue of executive wages at publicly-traded firms.

Pyramidal corporate structures allow for the control of a large number of subsidiaries with relatively little capital invested.

The committee included in its recommendations that a majority of public shareholders who are not parties of interest approve senior wage packages at companies with a pyramid of control. Ben-Bassat said the recommendations were an improvement over the existing situation, but were not enough. "[Economic] centralization is one of the negative results of the pyramidal structure and therefore we must find a fundamental solution to the problem of pyramids [of control]," he said.

Ben-Bassat said recent research shows that institutional investors vote about 80% of the time with management on salary issues, and the committee's recommendations would not solve the problem of excessive wages. He said the recommendations would improve transparency and improve ethical norms in the firms, since directors would now be required to state explicitly how they set executive salaries in relation to those of the workers, but he did not see how that in itself would lower executive wages.

Ben-Bassat, 66, served as director general of the ministry from 1999 to 2001, served as director of the Bank of Israel's research and foreign currency departments, and now teaches economics at Hebrew University. He is also a senior fellow at the Israel Democracy Institute.

Ben-Bassat does agree with the Neeman committee that executive wages in public companies should not be limited. "It is undesirable to intervene administratively in executive salaries in public companies, since we do not know what ratio to set between executive salaries to the average wages in the company; or between executive salaries and the lowest salary in the company," said Ben-Bassat.

Instead, he recommended using taxation to narrow the gap between senior management. "We should use one of two possibilities. The first is to set a salary ceiling, above which all additional wages will not be recognized as a business expense for tax purposes, similar to the U.S. Such a mechanism would raise the cost of wages to the company, since it will be required to pay higher taxes, which will rein in the wages they pay employees," he said. "The second possibility is to set two higher tax brackets for especially high income."

For example, he suggested such taxation on salaries of over NIS 200,000 per month. This would allow lowering taxes for those earning less or improving public services.

Ben-Bassat rejected claims that higher taxes on such excessive salaries would cause managers to leave the country or hurt investment - and as a result stunt economic growth.

"The proposal relates to a very small number out of some 2,000 employees. It will not harm growth or investment processes. If we levy taxes on high wage earners it will not lead managers to flee since the selection of managers around the world is influenced not only by talent, but by their knowledge of the national and organizational culture," Ben-Bassat told the committee.

Ben-Bassat has spoken strongly in recent years against the level of economic concentration in Israel, and in support of dismantling large holding companies.