Caps for the fat cats

Fat cats who consume more than their appropriate share destabilize their entire ecological niche.

April 25, 2010 06:31
3 minute read.
Caps for the fat cats

money in hands 224 ap. (photo credit: Courtesy)

Topping the Ministerial Committee on Legislation’s agenda today will be proposed caps on whopping executive paychecks. On the face of it, the revival of this cause célèbre seems like mere populism. Fat-cat tycoons who pad themselves with inordinate privileges and disproportionate financial perks don’t win popularity contests. The politicians who take them on are certain to rake in public relations profits.

The bill submitted for the committee’s scrutiny is the pet project of two seasoned warriors against the moneyed elites – MKs Shelly Yacimovich (Labor) and Haim Katz (Likud). Their latest onslaught on perceived wage inequity will have come as no surprise.

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But what does make this legislative initiative a little different from all others is that the two are no longer alone. Their struggle to set limits on what are prevalently portrayed as excessive salaries has received an unexpected boost from an unlikely quarter. Bank of Israel Governor Stanley Fischer admitted with candor, when presenting the BOI 2009 report last week, that “a very serious problem exists in this sphere. We must formulate a strategy,” he urged.

Fischer didn’t go so far as to endorse what Yacimovich and Katz are promoting, but the very fact that someone of his standing seems to advocate a departure from the status quo surely reinforces them.

As Fischer acknowledged, deepening income discrepancies in Israel are no longer a marginal concern for doctrinaire ideologues. A sense of how immensely the gap has widened can be gleaned from the legislative proposal itself. In essence, it seeks to insure that any given firm’s highest earner won’t be paid more than 50 times what the lowest earner gets. By no stretch of the imagination can a 50-fold ratio be described as overly constricting. If a company’s lowest wage is NIS 4,000, the top monthly pay couldn’t exceed NIS 200,000 – a figure most of us would consider immensely more than sufficient.

Moreover, the Yacimovich-Katz bill effectively links the highest and lowest pay. If the top execs hanker for more, they would also need to raise wages at the bottom of the corporate hierarchy and then multiply by 50 for a higher result for themselves. This bill is slated to apply to all public-sector companies, as well as to publicly-traded private companies – firms whose securities are offered in the stock market.

Yacimovich and Katz further demand stringent reporting requirements applied to all such publicly traded companies, whereby they will have to disclose the amount of compensation paid to their top executives.

THE ODDS are stacked against the Yacimovich-Katz bill, even though there is growing support for it. Only three of the 19 committee-members unequivocally oppose the bill, while seven unstintingly back it. But the Treasury has already come out with all its mighty guns blazing against the bill. Cynics note that Treasury higher-ups have every personal incentive to fight the proposal; most of them are eventually head-hunted to fill top executive posts in the private sector.

The Treasury argues that any regulation would be self-defeating. Top executives can in any case easily bypass all restrictions via bonuses, options, and generous pension and retirement packages. It’s best, according to the Treasury line, to allow the market to determine wage levels. Yacimovich retorts that the market, left to its own devices, will behave according to the ruthless rules of the jungle.

Three previous legislative attempts in the same vein have floundered. However, they were handicapped by far lower salary caps. It’s not clear whether the ministerial committee will approve the latest effort. If it does, the Knesset plenum will likely prove a formidable hurdle.

There are weighty merits to the arguments on both sides. But the fact is that some executives earn exorbitant millions each month and that their extravagance – apart from biting significantly into company profits, equity values and stock-holders’ dividends – serves to demoralize others.

Ultimately greed harms the very market forces which are supposed to self-regulate. Fat cats who consume more than their appropriate share destabilize their entire ecological niche. Hence some form of outside regulation should be given serious consideration. In the Israel of 2010, it may well be indispensable.

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