Dankner, Kaplan and Ugly Norms

A month ago Cellcom published an earnings warning. The company, once safe in its position as leader of Israel's cellular sector, warned that 2005 revenues had apparently shrunk 9% while its profit had retreated by 22%.

The mobile operator took the opportunity to announce that its former chief executive, Yitzhak Peterburg, who found himself on the sidewalk as the company's results deteriorated, would receive a special departure bonus of almost NIS 11 million. Together with pay of more than NIS 8 million that Peterburg accrued in his two and a half years as Cellcom CEO, he can mark his stint at the company as a success.

Income of almost NIS 20 million in three years is something to boast about. It certainly sweetens the bitter pill of being called a lousy manager who'd been shown the door.

How is it that Peterburg is considered to have flopped, but he still gets NIS 11 million from the company he ran? The answer lies in the wage norms of the Israel's richest 0.001%. The norm is that once having stepped into that circle, you're automatically worth NIS 3 million to NIS 20 million a year. It doesn't matter who you are of what your achievements are. Nor does it matter if you own shares in the company you run or were just hired help. There is no discrimination in the 0.001% Club, not by gender and not by ethnicity and not by religious belief. The norm is the same or all: if you're in, you're worth millions of shekels a year in salary. End of story.

There are plenty of examples. Under the reign of Avigdor Kelner, over the last five years Polar Investment has lost 40% of its value. During that time he took home NIS 17 million in pay, of which NIS 7 million were in the long-term alone.

Rimon Ben-Shaoul, who did rather worse than Kelner at the subsidiary Polar Communications, received NIS 5.5 million pay last year alone.

It isn't only the high pay for bad managers that begs questions. One has to wonder about pay norms even at successful companies.

For instance, Bank Hapoalim chief executive Zvi Ziv, the bank's chairman Shlomo Nehama and its deputy chairman Danny Dankner are each to receive NIS 10 million in bonuses for 2005, plus the millions they get in salary. Bank Hapoalim achieved record profits in 2005, but one could argue what part derived from management talent and what part from the bank's being half of a giant duopoly. Would Danny Dankner, for instance, who did nothing remarkable in his management of Isracard in the last year, receive an NIS 10 million bonus from any other company in the private sector?

But why are we complaining: doesn't the free market set wages? No, it does not. This is not free market, this is the unbridled greed of the 0.001%, who feel they deserve millions for breathing. It is also the fault of the public's bad monitoring and control processes.

Even in arch-capitalist America, pay norms at the top have been raising eyebrows. A Harvard University study conducted with the Federal Reserve bank found that since the 1970s, the wages of CEOs have increased from 40 times the average wage, to 300 times the average wage. It turns out that the ones benefiting from America's economic growth since 2001 are the 5% of richest families, while the situation of the median family deteriorated by 3.6%.

When the Wall Street Journal confronted the American treasury chief with the data, he said that wage gaps are meant to reward productive workers.

One would therefore conclude that productivity is confined to those 5% of workers, who happen to be the best-paid.

No, rewards for productivity are not the explanation for the soaring executive paychecks. The explanation is the clique that the managers created, in which they all scratch each others' backs by approving profligate pay for one another. It is a club that the public of investors in the U.S. and in Israel allows to survive, because the institutionals (who represent the public) do not make it stop.

Maybe that is because the managements of the institutionals believe they belong to that exclusive club, which exploits capitalistic norms to line their own pockets.

This is not capitalism at its brightest, it is capitalism at its most contemptible. That is the message of executive pay.