Sub Rosa / Big Salary, Small Skills

Recently a list was published, naming the recipients of the 15 highest salaries at companies on the Tel Aviv Stock Exchange over the last 15 years. The list brought back memories.

Ofer Nimrodi, for example, the CEO of the Israel Land Development Corporation, which owns Maariv, topped the list twice, in 1994 and 1996. Given ILDC's sorry state, and particularly that of Maariv, it's hard to grasp why exactly he deserved his sky-high pay.

Itschak Shrem, one of the owners controlling the Shrem-Fudim Group, was the top breadwinner of 2000, making NIS 15 million. Since then, he's managed to cost his investors far more than NIS 15 million in losses. In fact, he can claim the dubious distinction of being the biggest destroyer of investment value in the past decade. And there's a spot for former Phoenix chairman Yossi Hackmey, top earner of 2001. Under his reign, Phoenix headed into decline, falling far behind its rivals.

Wait. The really big numbers are yet to come.

The top salary of 2005 went to Bank Hapoalim CEO Zvi Ziv: NIS 33.5 million. True, that year, public outrage forced Ziv to give some back, but he still kept NIS 20.5 million. Four years later, he was forced to resign for his responsibility for the bank's foolish investments in high-risk securities, which caused huge losses (and because he had poor relations with bank chairman Danny Dankner.

Ziv wasn't the only big breadwinner forced out in the economic crisis. Delek Real Estate CEO Ilik Rozanski stepped down after getting his company heavily into debt. That didn't keep him from making NIS 25 million in 2006. Mati Dov, who got his Lagna subsidiary into questionable real estate investments in Eastern Europe, went down the same path as Rozanski, earning NIS 25 million in 2007, and out the door in 2009.

No question about it: the speed of going from top salary to fired CEO shows what the alpha spot is really worth. Of the 15 top breadwinners over the past 15 years, seven or eight turned out also to be champs at destroying value for shareholders and the economy. Companies that paid top executives record salaries were later found to be very poorly managed.

And why is that? It's because they'd been led by what was good for the CEO, not the company.

Luv that risk

The logical conclusion is that a company paying its brass top shekel may well be exposed to excessive risk, and planning characterized by the short-term. The logical conclusion of that analysis is that the wary investor should steer clear of them.

Another conclusion is that vigilance in protecting the investors' interest coincides with vigilance over salary scales. It isn't about self-righteousness. It's business, pure and simple. A company that doesn't maintain reasonable pay standards is putting its shareholders' future value at risk.

It is, therefore, incumbent on major investors to demand salary reductions. That, of course, pertains primarily to institutional investors. If they were doing their duty, they would have declared all-out war on senior executives' salaries.

So all the lofty talk of high salaries serving as an incentive to maximize company profits is nothing more than sleazy propaganda. There is no connection between performance and executive compensation. There is no connection between the best interests of the company and of its executive. High compensation does not contribute to long-term corporate performance. Frequently, the reverse is true.

The only economic principle guiding executive compensation is having friends on the board of directors allow me to rob the corporate coffers, as, of course they also benefit from high salaries being paid where they work. Senior executives in Israel are beginning to be seen as a kind of cartel constantly concerned with raising the price received by its members, without any connection to the service or real cost involved, all at the public's expense.

If institutional investors don't bother to do something, maybe Antitrust Commissioner Ronit Kan can intervene.