Sooner or Later, Israel's Rich Will Be Made to Pay the Price

The issue of excessive compensation continues to make headlines, and rightly so; it has a harmful impact on society.

It's easy to understand where the doctors and social workers are coming from. They read in the papers how some people earn a million shekels a month, but when it comes to them, the Finance Ministry is not willing to talk about anything beyond a meager pay adjustment. They are angry and embittered, but really, what else could they be knowing that executives in publicly-traded company earn in a month what they do in several years?

Still, it seems the more the media condemn the exorbitant wages paid at leading publicly-traded companies, the higher the compensation paid to executives at these companies gets. That's because the boundaries of shame have been broken and greed has taken over.

Excessive pay is the outcome of several improper practices that have taken root here. The first is the "grade system," invented in the 1980s by Ernest Japhet, Bank Leumi's legendary chairman, and perfected by Bank Discount's Raphael Recanati. Japhet wanted to pay himself $1 million a year - in today's terms, higher than any of the exorbitant salaries being reported in the media. To get away with this, Japhet was forced to pay huge sums to the bank's managing director and his deputies. That's because you can't just pay yourself without "oiling" the entire system. Recanati perfected the "grade system," and paying huge salaries to senior executives became the accepted norm.

It is important to understood that when the controlling shareholder in a publicly-traded company appoints himself chairman and withdraws millions in salaries, he is effectively robbing the remaining public shareholders. Take David Azrieli, for example. As soon as he took his real-estate and shopping-mall group public, he appointed himself chairman and took an insane sum of NIS 25 million in salary in 2010.

It doesn't have to be this way. There is another way to go. Look at Steve Jobs, the CEO of Apple, who holds a good number of shares in the company. He pays himself a salary of $1 a year. That's because he knows he'll be paid for his work through the dividends the company pays its shareholders.

The Israel Securities Authority needs to prohibit controlling shareholders in publicly traded companies from paying themselves high salaries. I'm pretty certain that once they are out of the wage game, these generous shareholders will turn into great misers.

Another improper practice is the "pyramid system." This is a perverted ownership system, in which the parent company controls numerous subsidiary companies, and through them a great number of other companies, and so on and so forth. As a result, the controlling shareholder "above" holds the companies "below" by means of a small percentage of the capital. And when he pays his executives high wages, the main burden falls on the public shareholders, rather than on him. The Israel Securities Authority must eliminate this distortion as well by imposing a tax on dividend payments made by the subsidiaries of subsidiaries to the parent company. It must also prohibit offsetting profits within the conglomerate.

Another distortion is in the structure of company boards. In Israel's publicly traded companies, boards are comprised of the controlling shareholders' yes-men, including the external directors. This must be changed so that at least the external directors are appointed by an independent committee, without the intervention of the controlling shareholder. These external directors must also sit on the boards' salary committee. If they don't do their job properly, but instead give away millions just like that, they can be sued personally for negligence and then they'll have to pay the millions out of their own pocket.

The issue of excessive compensation continues to make headlines, and rightly so. It has a harmful impact on society. Monumental wage gaps are tearing society apart, damaging its fortitude, destroying solidarity and causing unrest. It is easy to understand today why the social workers are bitter even after receiving a big wage increase and why the doctors are ready to go on a prolonged strike.

It's because everything is relative. You judge your situation in relation to the society where you live. And when so many are receiving big salaries without any justification, the resentment and rancor increase, labor unrest brews, and ultimately, we all pay the price - including those among us who earn NIS 1 million a month.