[email protected]: Limiting executive pay

Neeman Committee recommends hands-off approach.

February 24, 2011 23:23
3 minute read.

ASHER MEIR 58. (photo credit: Courtesy)

Last year, MKs Shelly Yecimovich (Labor) and Haim Katz (Likud) proposed a law that would limit the salaries of managers in publicly traded companies to 50 times the salary of the lowest-paid employees. The law didn’t pass, but a committee headed by Justice Minister Yaakov Neeman undertook to examine the issue, and this it week published its recommendations.

The committee wisely recommended that no steps be taken to limit what companies may pay their managers.

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It is possible to describe the original bill as a “solution looking for a problem.” What is the problem that the 50-times formula was supposed to solve? If the problem is that workers are paid to little, then they could propose a law that would raise their pay. (Such a law would certainly be counterproductive, but at least it would be directed at an actual problem.) Is the problem that people are paid too much? Someone has to explain to me exactly why that is bad. Did Yecimovich wear black the day Stef Wertheimer sold his company to Warren Buffett for $5 billion? Did she sit shiva when Yossi Benayoun signed a £5 million contract to play football in England? Does she tear her clothes whenever Itzchak Perlman gets five or six figures for a major concert appearance? Why exactly is she upset that business managers are able to earn a lot of money? If such a law could be made effective, it would hamstring businesses. Suppose I find a manager who can make my company $10b., and he wants to get paid $1b.

Sounds like a bargain, doesn’t it? If there were a cap on executive compensation, the deal would never be allowed; my company would have to sit in the doldrums and perhaps fire workers instead of hiring new ones.

It could be argued in “defense” of such a law that it would really be quite ineffectual.

If I have a manufacturing business in which the lowest-paid workers get NIS 5,000 a month, and I can’t get the manager I want for NIS 250,000 a month (less than $1m. a year; not at all a high salary in many sectors), I can always spin off my company into a manufacturing company (top salary NIS 250,000) and a management company (top salary NIS 12m. a month). More likely I will just take it private.

(In the US, the Sarbanes-Oxley Act of 2002, which imposed strict accountability requirements on public companies, made many companies far less accountable to the public because it caused hundreds of companies to go private and drop off regulators’ radar almost altogether.) The Neeman Committee concluded that there is no reason to create a new bureaucracy to enforce a counterproductive policy that can be readily circumvented. Instead it recommended that companies be required to have a clear and transparent policy regarding executive compensation.

The objective is to make the directors more independent of the management.

There can definitely be a problem of excessive dependence of directors on managers, which would enable the latter to write their own salary ticket. But in my opinion this problem is not a serious one in Israel.

Indeed, the response to Sarbanes-Oxley showed that increasing the demands on directors can make it difficult to find qualified directors, just as limiting the pay of managers can make it difficult to find qualified managers.

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Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).

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