The Fat Kats Kream Klub

What do executive pay and the weather have in common?

Naturally - you can talk about them till the milch cows come home, but you can't do anything about them.

For a decade now, we have been watching management pay rise and rise. Yet every time financial statements season rolls around everybody's "shocked" by the figures.

One can come up with five reasons why management pay has been rising.

1. Intensifying competition, spreading globalization, and increasing business opportunities force companies to pay their hired management talent more. The returns of good management are greater than the returns of capital.

2. Israel has been adopting American remuneration norms. Managers have long stopped being embarrassed about being paid hundreds of thousands of dollars a year, and the company owners have no choice but to go along. The growing number of Israeli companies listed on Wall Street and American companies operating in Israel has tightened the ties between the two markets.

3. Hi-tech prosperity and stock options created new thresholds for remuneration.

4. The rapid development of the capital market created opportunities for company owners to reward managers without dipping into their cash - namely, through stock options.

5. The number of companies controlled by hired managers, as opposed to the controlling shareholders, is growing. The members of the exclusive clique of managers and directors excel at heaping pay, options, bonuses and golden parachutes upon one another.

When annoyed by the griping, lavishly-paid managers tend to accuse their detractors of suffering from Israeli narrow-mindedness and ignorance of practices in the world markets.

But that's quite an inaccuracy. A survey conducted last week, published on Tuesday by Bloomberg in collaboration with the LA Times, found that 84% of well-to-do Americans (earning $100,000 or more a year) think executive pay in America is too high.

That proportion is greater than the part of the general population thinking executives get paid too much. The higher one climbs in the ladder of wealth, the less tolerance there is for executive pay.

Well, can anything be done about it? Yes and no.

No: In a free market, there is no way to legislate a cap on executive pay. You can't stop a company owner from paying his management whatever he wants to. Also, it's hard to separate remuneration through wage remuneration through bonuses and remuneration through capital gains.

Next week Tel Aviv will be learning how extraordinarily high the pay for Bank Hapoalim chairman Shlomo Nehama was in 2005. Immediately minds will drift to the layoff sat Bank Hapoalim, the hefty fees that the bank charges, and the duopolistic structure of the banking system that enables Bank Hapoalim to pay as much as it does.

But the million and something shekels that Shlomo Nehama earns each month is peanuts. He cut his real half-billion shekel coupon when billionaire heiress Shari Arison bought his shares in Arison Investments from him, a 17% chunk that her father Ted Arison had given to Nehama a decade before.

Gil Agmon, the chief executive of Delek Automotive, attracts no particular attention in the ranks of the well-paid. Sure, that NIS 300,000 a month in his pay-slip is impressive but it pales in comparison with the quarter-billion he's made in the last five years from stock he was allocated in Delek Automotive.

Clearly, therefore, the difference in attitude toward executive pay and toward dividends or capital gains that company owners take is artificial. They cannot really be distinguished or limited, not in the framework of the free market.

What can be done? A market structure could be created in which poor or mediocre managers can't take home gigantic remuneration just because they belong to the Fat-Kat Kream Klub. Not a few of the names at the top of the salary lists straddle pork barrels or run monopolistic or cartelistic companies.

These companies' positions enable them to milk the public dry and to pay giant salaries to their top management. But the truth is that if you chain a goat to the CEO's seat and send him back to his stable by taxi each night the company's results at year-end wouldn't be much different.

Here is another reason for aggressive pro-competition regulation to reduce government involvement in the economy: in a competitive economy with small government, the highest salaries are paid to superlative, creative managers who fight over customers, not managers who lounge around secure in government support. The more competitive the market is, the more choice customers and workers have, the lesser the chance that executive pay will mushroom.

Lesser, not small: company managers, even the lousy ones, have clever methods to increase pay even when the company is doing badly. They take bonuses in good years and don't return them when the lean years arrive. They take options at low share prices and sell them before the crash.

The ones best positioned to put a stop to managerial excesses are institutional investors - provident funds, mutual funds, insurance companies, that own stakes in the companies.

The problem is that they have no interest in confronting managements. They also think in the short run, about the next job. They don't want to burn down the club, they want to join it. And here's the forecast: stock options will continue to rain down.