Ministers Approve Pay Caps for Execs

Panel okays Neeman Committee recommendation to cap pay of senior executives at publicly-traded companies, but detractors say move has no teeth.

The Ministerial Committee for Legislation has unanimously approved the Neeman Committee's recommendations to cap the pay of senior executives at publicly-traded companies. But market players and plenty of parliamentariams are profoundly skeptical that the reform will make any difference at all.

Some Knesset members, from all sides of the political map, say the recommendations don't go far enough.

Yaakov Neeman - Olivier Fitoussi - 06032012
Olivier Fitoussi

"This is a balanced proposal that was developed after ... a thorough and comprehensive investigation of OECD countries and the rest of the world, including Israel. I believe Israel will serve as a light unto the nations in the field of executive pay," said Justice Minister Yaakov Neeman, who heads the committee named after him. "The government will monitor the issue of executive pay over time. This isn't a quick fix. The government will review the implementation of the recommendations in 2015."

Neeman and Avi Licht, the deputy attorney general, briefed the ministers on the recommendations. Among other things the two stressed that publicly traded companies would have to approve the CEO's pay specifically. That, after all, is the basis by which other executive pay at the company is set.

Companies will also be required to address subcontract workers' pay. Neeman and Licht added that distribution of stock options would take into consideration companies' long-term performance.

"The recommendations are balanced," said a legal source, after the committee gave its approval on Sunday. "They will allow the economy flexibility and won't generate overbearing regulations. On the other hand, we mustn't ignore that there are public companies where salaries are very high. The committee tried to find a novel arrangement to solve the problem."

Government officials are considering bringing the recommendations before the cabinet soon, so they can be submitted to the Knesset before it adjourns for Passover.

The goal is to have the bill become law by the end of July when the Knesset adjourns for the summer.

Politics as usual

The recommendations of the Neeman committee will be discussed together with the recommendations of a not-entirely dissociated panel: the economic concentration committee.

Knesset sources say approval of the Neeman Committee proposals will be influenced by politics as well. If early elections are expected, MKs might be more susceptible to pressure from the business sector to at least water down the recommendations. If, as many political sources say, the summer session turns out to be the Knesset's last before early elections, the recommendations might not be passed.

Some MKs have called for a stricter law. "Neeman is diluting one of the most critical problems in Israeli society and forgoing a thorough treatment of class disparities, but he probably has his reasons," said MK Moshe Gafni (United Torah Judaism ), chairman of the Knesset Finance Committee. "A maximum cap on salaries must be set." He also called for high tax on people earning "delusional and absurd salaries."

The ball of executive pay had been set rolling by Labor Party chairwoman Shelly Yachimovich and Likud MK Haim Katz, chairman of the Knesset Labor, Welfare and Health Committee, who had submitted a private member's bill to limit executive pay at public companies. Their initiative spurred the creation of the Neeman Committee.

Yachimovich and Katz said this week that the proposal approved by the Ministerial Committee is a sham that will achieve nothing.

"We regret that the sensible and easily implemented bill we submitted two years ago, in which top pay won't amount to more than 50 times the lowest wage, was stymied for two years by the Neeman Committee, which ended up with the pitiful proposal now raised," Yachimovich and Katz said in a statement. They said they would now resubmit their original bill and fight for it.

Doubts in the capital market

Many top investors and officials in the capital market declined to comment on the Neeman recommendations, some because they hadn't yet delved into the proposals. They also probably prefer not to discuss pay to avoid irking controlling owners, corporate managers and the Israeli public.

"The bill will come up before the Knesset only in May," said Amir Eyal, chairman of Infinity Investment House. "This bill doesn't place any limit on executive pay, it just gives the public tools to try fighting over pay at shareholder meetings. In any case, it's the board of directors that decides. The ratio between executive pay and the average wage isn't limited, so the message is mainly one of transparency, with a message saying 'we've had enough of the excesses,' although it's worth compensating talented managers considerably."

A market source added: "It's unpopular to say, but I don't think there will be an effect on companies, or maybe just a marginal effect on mid-cap companies." The conclusions should be kept in perspective. High pay won't affect company valuations. This is just another layer of overregulation that's pushing companies away. This is about high salaries to hired CEOs, not controlling owners whose pay is approved by general shareholder meetings anyhow. If the controlling owner decides he enjoys paying the chief executive NIS 2 million, apparently it pays off for him."