Taking Stock / Outside a Small Circle of Friends

The NIS 33 million Bank Hapoalim CEO Zvi Ziv received in 2005, and the NIS 23 million the bank's chairman Shlomo Nehama took, managed to shake the Israeli public out of its apathy.

The daylight robbery of executive pay did not begin in 2005; it has been steadily rising for 20 years. What drove the Israeli public crazy is the combination of two factors: gigantic figures, of a magnitude never seen before, and the fact that the payer is a big bank.

As long as the gigantic salaries were confined to companies nobody really understood (neither what they sell nor how they make their money), the whole thing began and ended with a headline in the daily paper. But when the company in question is a big bank, every Israeli sees clearly the connection between the interest and fees he pays and the fat-cat salaries of the bank managers.

Interim Prime Minister Ehud Olmert sniffed the wind and leaped at the opportunity. Leaks over the weekend had it that Olmert is considering limiting executive pay at publicly traded companies.

Here is our prediction: The storm will die down and no caps will be slapped on executive pay at these companies. Very quickly, it will become apparent that there is no practical way to limit pay in a free market, and in any case, it's senseless to artificially distinguish between executive pay and the profits the owners of these companies rake in.

Anybody contemplating a law limiting such pay would immediately collide with some very hard questions. Can wages and stock option allocations be limited at high-tech companies? Probably not: they are part of the global economy. Can the law distinguish between high-tech companies and financial ones? Almost certainly not.

Say one manages to formulate a clever law that limits pay at publicly traded companies through imposing additional tax on giant salaries. How long would it take the fat cats to organize gigantic options plans with lowered tax?

Regarding Bank Hapoalim itself, by the way, we predict wages there will decline in the years to come, but for a far more prosaic reason. Now that chairman Shlomo Nehama has sold his shares in Hapoalim (which he had held via Arison Investments) to Shari Arison for NIS 700-800 million in cash, his appetite for creamy salaries is going to be diminished.

Big money and hired help

Not only will the big money sate Nehama's appetite for limits on salaries, but it may even change his view of the world. With big money, he can invest and own other businesses - and will start thinking like a corporate owner: Profits from companies should benefit their founders and investors who risk their money, not the hired help.

However, at the other banks and among most employees on salary, appetites grew keener in the last year, after they saw how much Shlomo and Zvika were making. At Bank Discount yesterday, they admitted that the impetus behind the enormous stock options plan for the top brass had been "what Eli Yones got at Bank Mizrahi."

If Olmert really wants to tackle the mechanism by which the free market massively transfers wealth from the public to a handful of fat cats, he should have a chat with some of his best friends. They will explain that the media ruckus regarding executive pay is a wonderful smoke screen behind which hide the real mechanisms shifting money from the many to the few.

1. Yoram Turbowicz, manager of the prime minister's staff and formerly Israel's antitrust commissioner, can explain to Ehud that the main way to grow rich in Israel is not through high-tech, but through developing and jealously guarding a monopolistic or cartelistic business that sucks the marrow of the consumers. "If you're really concerned about social gaps in Israel, you have to double the Antitrust Authority's budget and back its efforts at investigation and aggressive enforcement," he will say.

2. Ram Balinkov, a close friend of Olmert's, is the CEO of the HOT cable company and formerly served as CEO of Golden Lines (Kavei Zahav). Profits at both companies are highly sensitive to regulatory and structural decisions. He can tell the prime minister, "Ehud my friend, this whole story about executive pay is peanuts. Ministers and bureaucrats at the economic ministries in Jerusalem can weaken or strengthen competition in most sectors with a wave of their hand. They have the power to transfer hundreds of millions from the many to the few, or vice versa."

3. Eitan Raff, chairman of Leumi, is another Olmert crony. He can privately whisper what every last banker knows: "My dear Ehud, no banker could make NIS 20 million or NIS 30 million a year if Israel's governments hadn't turned the banks into gigantic, monopolistic money mills. The only way to stop the looting is through more reforms of the capital market, to weaken the monopolistic power of the banks. And if that doesn't work, you have to threaten to slap supervision over the fees they charge for services."

4. The Dankner family has a secret it could impart to Olmert: "Ehud, our friend and benefactor, limiting pay at the banks might cut a few millions from Dan Dankner's pay at Bank Hapoalim, but you know perfectly well that it's nothing compared with the coupon we cut from the gigantic land rezoning that the Israel Lands Administration approved for us at Atlit and Eilat. The attorney general ruled that the rezoning was irregular, but you ignored him. And we're not some sort of special case: each year billions worth of state assets - lands, franchises and permits - pass to skillful entrepreneurs who know how to work the system and have people in the right places. So why are you picking on the millions that the banks pay to their managers?

5. Avraham Hirchson, Olmert's pick for finance minister, could say to his new master: "Ehud, let it go. You're meddling with the NIS 33 million that Zvi Ziv managed to extract from Bank Hapoalim after climbing the ladder for 30 years and turning into Israel's No. 1 banker. That is nothing compared with the achievements of my son, Ofer. In less than three years he managed to extract double that from the banks through dubious deals, in which he lost most of the money and lives like a millionaire.

In short, the executive pay at the publicly traded companies is irritating, but it's like the weather. You can gripe, but you probably can't do anything about it.

The victory that public opinion won at Bank Discount, which postponed the general assembly of shareholders supposed to approve a giant stock options plan for the management, will prove to be short-lived. If the bank's owner, Matthew Bronfman, wants, he will find a way to pass those millions to his managers.

But the prime minister and other elected officials do have effective tools to handle the real robbery of the public kitty. But experience shows they lack the willpower, and even when they find some, their ability proves weak.