Israel Must Not Be So Extreme on Salary Cap Legislation

Legislation of a maximum salary exists in no other country with a free market. No link is needed between the salary of the CEO and the pay of the lowest-paid worker.

Haaretz Editorial
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Israeli Finance Minister Moshe Kahlon briefing reporters at the Knesset on Monday.
Finance Minister Kahlon briefing reporters at the Knesset on Monday.Credit: Lior Mizrahi
Haaretz Editorial

The bankers and executives in the financial industry have brought on themselves the legislation limiting executive pay. They did not heed the calls from the public and the criticism from Knesset members, and continued to pay themselves high salaries, which is hard to justify and in many cases bears no relationship to their business results. They stretched the rope too far, until it broke.

The original proposal to limit executive pay, sponsored by Yair Lapid when he was finance minister, stated that every shekel paid above 3.5 million shekels ($911,000) a year, including bonuses, will not be considered tax deductible as a business expense. Today too, not every business expense is recognized for tax purposes. For example, if the CEO flies abroad in first class, the tax authorities will not recognize the ticket as a business expense. They will only approve the cost of a business class ticket.

It can be assumed that the new norms and the additional taxes will create pressure on the CEO to reduce his salary to a more reasonable level, and as a result a cure will be found for the disease of excessive executive compensation. This has particular importance in places such as banks and insurance companies, where the publics money flows in every month and the government must come to their aid in times of crisis.

But Finance Minister Moshe Kahlons proposal, which will be brought before the Knesset tomorrow for its final votes, and in which the untaxed ceiling has been reduced too far, to only 2.5 million shekels a year, has a problematic section.

The MKs convinced Kahlon to introduce a limit into the law in which the salary of the CEO cannot be more than 44 times the pay of the lowest paid worker in the company, including contractors. This is a fundamental economic error. No link is needed between the salary of the CEO and the pay of the lowest-paid worker. A person is meant to receive wages based on their contribution to the company, the demand for their labor and the alternatives in the job market.

Legislation of a maximum salary exists in no other country with a free market. It would have been preferable for the government to reach an understanding with the financial sector; but since that did not happen, the legislation must be proportionate. Israel, a country looking for investment, must not be the most extreme on the issue.

The limit of 44 times the lowest salary was not Kahlons idea, he agreed to it in a telephone conversation with members of the Knesset Finance Committee, without studying the matter or consulting with the professional staff in his ministry. And so the supervisor of capital markets, Dorit Salinger, and the head of the treasurys budgets division, Amir Levy, oppose the limitations; they understand it has no real benefits, but instead will harm economic growth.

Kahlon and Knesset members must return to the original bill and make do with the limitation of not recognizing wages of over 3.5 million shekels a year as a business expense for tax purposes. It will provide a strong signal to the boards of directors of the banks, insurance companies and investment houses not to pay excessive compensation any longer, except in the most exceptional circumstances.

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