Right idea, problematic method

Ron Stein

The proposal to cap deductible salary costs will fail to stem salaries.

Yesterday's remarks by Minister of Finance Yair Lapid and top Ministry of Finance officials do not mention restricting actual salaries, but creating a mechanism to instil salary norms in the financial industry by raising the cost of executive compensation agreements that exceed the normative threshold. On the face of it, this is a welcome initiative for dealing with what has turned out to be market failure in Israel. But it seems that the ministry's current plan is far from a foolproof solution.

The NBA imposes a salary cap on teams, which can be exceeded. However, any team that exceeds the cap pays a fine. In theory, teams are supposed to want to avoid the fines and extra payments, but in practice, every year, for years on end, there are teams that exceed the cap.

The same thing is liable to happen in Israel. Until now, executives' salary cost was not an obstacle to paying very high salaries. It seems that as far as the shareholders and directors in financial institutions are concerned, as well as many financial institutions that approved generous agreements with great ease as minority shareholders in other financial institutions and public companies, an additional expense of a couple of million shekels "is worth it" for a good manager.

Therefore, a partial directive ordering an additional payment by a company for executive compensation is liable not only to fail to stem the salary expense, but to immediately boost executives' salary cost. Although the approval process of executive compensation will be exposed to the daylight of general shareholder meetings, it should not be forgotten that, in the past, the voters in these meetings did not hesitate to approve the high salaries that "angered" the public and the finance minister.

It seems to us that there is no choice but to deal with the issue of skyrocketing salaries by those who can rake more in while the salaries of so many are steadily eroding. This is true for financial institutions, public companies, and even private service providers. Excessive executive salaries partly come at the public's expense. On this point, the Ministry of Finance is right.

The lack of intervention on this matter until now, while worrying about increased transparency only inflated the value of executives (more than one of whom froze employees' salaries), and they frequently benefited from capital market rallies without creating any real value at their companies. Therefore, steps should be taken, otherwise the price of executives will only continue to soar.

In conclusion, the special attention given to the financial industry by the top Ministry of Finance officials is right. This is a unique industry that has immense regulatory backing that sometimes justifies different and tighter regulation by the sovereign. This is because these are institutions that manage other people's money (the public's money). For this reason, and because of the huge importance that these institutions have for the entire economy, the state takes extraordinary care that the banks and insurance companies are profitable, prevents extreme competition, and makes it difficult for new competitors to enter the market, while its laws send fixed demand for the services that the financial institutions provide.

These are reasons enough to also justify special attention to executive pay in the financial industry.

Published by Globes [online], Israel business news - www.globes-online.com - on April 7, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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