Taking Stock / Capitalist Pigs and Anachronistic Bolsheviks

The phone call from the finance minister's office came at 10 A.M.

The minister, his people said, had not been understood. In his interview with TheMarker, he had not said that Bank Hapoalim chairman Shlomo Nehama's pay was beyond the pale. Answering a question about Nehama's pay, he had said that what was improper was the duopolistic structure of the banking system, under which Bank Hapoalim and Bank Leumi control two-thirds of all financial mediation in Israel.

Ostensibly, the correction was a semantic one, but in practice it wasn't a question of semantics at all. Whether he meant to or not, the finance minister touched on one the most important aspects of management pay in Israel.

The debate about management compensation is generally shallow and populist. People who support high executive pay are immediately dubbed capitalist pigs, and opponents are tarred as anachronistic Bolsheviks.

The whole debate about executive pay is rife with slogans and catch phrases, and every blight and plight plaguing the economy and society gets roped in.

The public debate about executive pay is based on published data, but this is where the first fallacy lies. Registering on the stock market obligates the registered companies to reveal the pay of their top five executives, but it doesn't make the companies any more "public" in nature than the companies not listed on the exchange, which are called "privately held."

Yes, the "publicly traded companies" have generally raised money from the public, meaning from provident and mutual funds, insurance companies and pension funds, but the stock market is not the only place where public money is floating around. Registering for trade on the exchange does make a company public in the legal sense, but from an economic perspective there are a lot of companies not registered on the stock market which are even more public in nature.

Pop quiz: What is Cellcom?

Cellcom is not listed for trade on the Tel Aviv Stock Exchange, but it operates in a market which is barely competitive; its profits are largely set by regulation. Even though the public doesn't hold any of its shares directly, it finances the company's profits through its cellular communications bills.

Israel's big car importers are almost all privately owned, and nobody takes any interest in the tens of millions of shekels their managers take home each year. But are they really "private?" Is Israel's car import sector competitive? Or does it benefit from cozy regulations, allowing importers to rake in extraordinary profits at the expense of people buying cars and spare parts?

Why are thousands of small and medium-sized businesses belonging to people affiliated with government and party officials and whose revenues derive almost entirely from government tenders considered "privately held"? Just because their stock is not registered for trade?

Here's a question. Which company is more "public" in nature - an Israeli hi-tech company registered on Nasdaq in which Americans own 70 percent of the stock and which sells entirely on the international markets? Or a private contractor making 90 percent of his income from local government?

If all the financial statements of all the privately held companies, partnerships, and firms in Israel were published, we'd learn all about the enormous salaries there too, and we'd see that some of Israel's most profitable companies are privately held ones operating in sectors largely devoid of competition - thanks to absent or weak legislation, or from selling goods or services to government.

Mind the social gap

The debate is not theoretical, because the cost of managers at Israel's publicly traded companies keeps being mentioned in one breath with social gaps.

Why isn't the cost of tens of thousands of redundant public sector workers mentioned in the content of social gaps? Why is the bloated NIS 40 billion defense budget ignored in this context? Why are the billions lavished on businesses, advisers and retirees with their nose in the government trough never mentioned in the same breath as social gaps?

The billions leaking from the national budget to corrupt deals and the billions collected from consumers by companies operating in effectively monopolistic environments both affect social gaps far more than the amount made by the 100 top earners at companies registered on the stock market.

The freedom of the car importers, the cellular carriers, the insurance companies, the banks, the Israel Electric Corporation and local government entities to charge inflated prices because there's no competition directly, and painfully, impacts the expenditures of every household in Israel.

The amounts the best-paid people on the stock market earn is perfectly well known. The companies report that information outright, and it's annoying, too, which is why people keep dwelling on it. It's easy to grasp. But the debate on uncompetitive markets, monopolies or billions spilling out of the budget is complex, so there is little debate, and what debate there is only rarely tied to social issues.

The question the "social conscience" organizations should face is how long they'll continue wasting their time fighting inflated salaries given to a few hundred managers of publicly traded companies. They are going to lose that battle, anyway. There are other things they should be focusing on, and they might just win.