Executive Salary Limits Move Ahead

The compensation paid by public companies to their top executives may be one of the first things to change in Israel as a result of the global financial crisis.

The compensation paid by public companies to their top executives may be one of the first things to change in Israel as a result of the global financial crisis.

The bill proposed by MK Shelly Yachimovich (Labor) to limit executives' salaries is now gaining momentum in the Knesset, and certain sections of the bill have garnered the support of Justice Minister Daniel Friedmann and the chairman of the Israel Securities Authority, Zohar Goshen.

Yachimovich has been holding discussions with the justice and finance ministries and the ISA over the past few months to reach an agreement to allow her legislation to advance.

Last week Friedmann sent a letter to Goshen asking him to prepare regulations on the matter. Friedmann made three recommendations:

1. Public companies will be required to report the five lowest salaries in the firm in their financial reports, including those of contractors and service providers. However, the lowest paid will not be named.

2. Public companies will be required to report the number of employees earning less than 1/40th of the highest wage paid in the company.

3. If the ratio between the company's highest and lowest salary is more than 40 times, the board of directors will be required to detail the basis for the high salaries, including if the company's performance in the previous year was above or below average compared with public companies in general, and in the specific business sector.

Yachimovich's basic proposal, which earned the support of the ministerial committee on legislation, even though the treasury objected, was even more radical. It would require the company to keep to a ratio of no more than 50 times between the highest and lowest salaries, and the highest salary could only be raised if the lowest were raised too - unless the firm received the approval of the minister of industry, trade and labor.

However, Yachimovich's proposed law also stated that for any salary over 50 times the lowest, the excess amount paid would not be recognized as a business expense for tax purposes.

Yachimovich views the enormous salaries paid to managers in recent years as a replacement for dividends - which hurts the investing public in favor of the managers or controlling shareholders.

However, Yachimovich's bill has worried the ISA, which feels that the firms will object and simply find other, more problematic ways to avoid the new rules. Therefore, senior ISA officials met with her and treasury officials over recent months in an attempt to formulate a new, more moderate bill.

The ISA's proposals would not limit salaries, but instead increase transparency and disclosure. They also place more responsibility on the boards of directors and subcommittees in setting compensation levels.

For example, the ISA is satisfied with the steps taken last year by Bank Hapoalim, when the board was forced to reduce the NIS 70 million granted to the three highest executives after the ISA intervened. The ISA required the board to provide details on how they set the compensation, and present the protocols of the meetings involved.

As a result of the pressure, the total compensation for the three - Shlomo Nehama, Dan Dankner and Zvi Ziv - was reduced to "only" NIS 45.8 million.

The ISA also recommended a number alternatives instead of Yachimovich's proposal, including providing accurate and detailed information on compensation, justification for such payments based on performance, information concerning the employment of controlling shareholders and their compensation, information on linkage of the compensation for various managers, and relative levels of compensation compared with other companies.

Yachimovich said yesterday that the time has come to limit astronomical salaries. She said Israel is developing two separate universes: one with unlimited greed for managers, the other consisting of employees working for starvation wages, as well as the public, which is paying the price in the form of the market crash.