Social Protest Really Can Work - Just Ask Israel's Top Executives

The recent decline in the average salary for top executives at publicly traded companies can be credited to the social justice protests of 2011, which made it harder to get approval for huge salaries.

“The dogs may bark but the caravan moves on,” as the saying goes, meaning that criticism is futile. That demonstrations change nothing. Whatever the situation is, it will continue to be, while the critics fume. Politicians and business people have such thick skins that they don’t feel the venom. They may get spat upon, but they think it’s raining.

It turns out, however, that this skepticism is not always well-founded. There are times when public criticism actually does yield results. And one of those successes involves the pay given to senior corporate executives.

A few days ago, the Israel Securities Authority released the results of a study showing that in 2011 and 2012 there was a substantial decline in the salaries that the top people at publicly traded companies received. In 2010, the average salary cost for these senior business people was NIS 3.8 million a year, but by 2012, it had declined to NIS 3.2 million. The decline is also in contrast to the period from 2003 to 2010, when salary costs were on a steady rise.

The shift in direction was the result of the social justice protests that erupted during the summer of 2011 and which made it harder to get approval for such huge salaries. It’s tougher to give the top people salary increases when demonstrators who can’t meet their expenses at the end of the month are taking to the streets, and when the newspapers are full of criticism of the pay senior executives are getting. It’s also impossible to explain the need to hike the pay of a CEO or corporate chairman to a company’s board of directors, when that same company is rescheduling its debt at the expense of members of the public, whose savings are in the firm’s corporate bonds.

Public pressure to rein in excessive executive compensation gathered steam after the global economic crisis of 2008 − as a result of the incomprehensible disparities between the salaries at the upper echelons of these firms and the poor financial results the companies were producing. As a consequence, in September 2011, an amendment was passed to the Companies Law requiring the support of at least 50 percent of minority shareholders in favor of controlling shareholders’ compensation packages.

The salary free-for-all at publicly traded companies is nothing new. It’s been going on here for more than 30 years. Following the collapse of local bank shares in 1983, a public panel, the Bejski committee, was set up, which fired all of the top banking executives, including Bank Leumi’s chairman at the time, Ernst Japhet, who ruled the roost at his bank. And even though the public committee pinned responsibility on Japhet for his role in the manipulation of bank shares, he managed to extract a handsome severance package from the bank − a one-time payment of $4.4 million and a $28,000 monthly pension.

During that period, there was no requirement that publicly traded companies disclose the salaries of their top five executives, so no one was aware of what these senior people were earning. In 1987, Haaretz published a report about Japhet’s severance package and salary, which was nearly $1 million a year. There was an immediate public outcry and the Knesset passed legislation requiring companies on the stock exchange to disclose the salaries of their top five executives. So that’s why we know what senior people are making today.

In addition to the importance of disclosure, it would be appropriate to amend the Companies Law again to bar controlling shareholders from drawing a salary, other than a nominal sum, if they serve as their company’s CEO or corporate chairman. Their compensation should be in the form of corporate dividends as their share of their company’s profits. Once controlling shareholders can no longer draw millions from their companies as salary, they will also cut the compensation paid to their companies’ other top executives, because their personal interest in extravagant wage packages at the senior level of their own corporations will be no more.

There are those top executives and their lawyers who claim that the disclosure of senior salaries actually increases the pay at the top due to pressure from those earning less, but experience shows that salary disclosure actually tamps down salary levels, due to criticism from the public.

In any event, as U.S. Supreme Court Justice Louis Brandeis said, “Sunlight is said to be the best of disinfectants.” In fact, there is a considerable number of cases in which top business people have had to forgo some of their excessive pay once their salaries were disclosed. And don’t forget that the new Israel Securities Authority study shows that senior executive salaries on average have been declining − which proves that sometimes when dogs bark, it makes a difference.