Taking Stock / Giving Overpaid Bosses a Bad Name, With Feeling

One of the innumerable lawyer jokes making the rounds is that the real problem is image. The 98 percent of lawyers who are dreadful are ruining the profession's good name.

That joke came to mind when perusing the populist wave of articles in the press, a tidal wave that crops up every year, against the high salaries given to the leaders of some publicly traded companies.

Originally, we considered writing about how these salaries are dictated by market economics, which confer perfectly well-known advantages and disadvantages. Performance-related reward is still the main engine driving excellence.

We had meant to write that high salaries for talented managers, workers and entrepreneurs result from their negotiations with controlling shareholders.

We were going to describe that huge paychecks always get mentioned in the same breath with poverty and social gaps, although the connection is tenuous indeed. Lowering salaries for the uppermost echelon wouldn't drive more economic growth, resolve poverty or improve the education of the masses, nor would that reduce wage gaps. Israel's richest people aren't living on monthly paychecks: they own the companies.

We wanted to bring the readers' attention to the fact that TheMarker Magazine's list of the 500 richest people in Israel, published today, has less than 10 people on salary.

Most of the people on the list are also appalled by the practice of lavish monthly salaries for their hired managers. They have to pay the money, after all.

Hmm. How much am I worth

But then we looked at the chart of managerial wages in Israel's publicly traded companies, and learned that in 2004, the 98 percent of the stars studding the list are giving the other 2 percent a bad name.

The main charge, that high pay for managers results from the open "market of managers," crashes into reality. Out of the 30 best-paid managers on the stock market this year (not including severance compensation), 22 were controlling shareholders or had interests in the companies in question.

In other words, two-thirds of the top 30 best-paid managers on the stock market negotiated their pay with themselves.

In economic argot, it wasn't market forces setting their remuneration. The cap was set at the maximum they figured they could squeeze out of the boards, which in most cases they also controlled.

Chaim Katzman. Nochi Dankner. Meir Shamir. Ilan Ben Dov. Itschak Shrem. They didn't negotiate their salaries for real, because they're their own bosses, and the external directors at their companies have no real clout or interest in holding tough negotiations.

It didn't end there, either. When a controlling shareholder or interested party wanted to withdraw especially high pay, then he might have to amply reward his immediate inferiors in order to justify his own inflated wage. Maybe 80 percent, maybe 90 percent, and not two-thirds, of the highest pay in these companies results from that practice, not from merit.

Destroyers of value

The second claim made by the proponents of high pay are that free market economics pays for performance. You did well, you make money. You didn't, you lose.

Nonsense. Some of the most amply rewarded people on the 2004 list were destroyers of value in preceding years. The giant profits they presented in 2004 mirrored the giant losses caused beforehand. When their companies earn money, they get bonuses, and when the losses mount, no heads roll nor are they told to give back money.

If you're some rising star in the business sector, proudly presenting genuine value to shareholders and owners and zooming up the corporate ladder while utterly convinced you're worth every penny you get, and you're mad as hell about the populist wave against high pay, don't take it personally. It's that 98 percent that's giving you and the thousands of people, managers and entrepreneurs in the private sector who deserve handsome remuneration a bad name.