Ethics at Work: Maximum wage revisited

Proposed salary caps in government firms are unreasonable.

Business ethics 88 (photo credit: )
Business ethics 88
(photo credit: )
It is fairly clear that the true message of the two "maximum wage" bills currently being discussed in the Knesset is, pay people as much as you want, but don't ask the public to be a partner in outrageous salaries. Shelly Yechimovitch of the Labor Party submitted a bill, approved in its first reading, that would limit the salary of the highest-paid worker in any organization to fifty times the salary of the lowest paid worker. Dani Yatom of the same party submitted a bill which would limit managers' salaries in government-owned companies to ten times the minimum wage. The bills seemingly have a similar egalitarian objective but actually they are quite different. Yechimovitch's bill is on its face the more outrageous, since it limits salaries in the private sector, something which is seemingly beyond the legitimate public interest. Whereas the object of limiting salaries paid by the government itself (since the government is the owner of the companies), as Yatom's bill proposes, seems well within the purview of the Knesset. But the actual content of the bills gives the opposite impression. First of all, Yechimovitch's bill does not actually forbid above-limit salaries to senior management; it merely fails to recognize them as a deductible expense. The true message to management is: pay people as much as you want, but don't ask the public to be a partner in outrageous salaries. The caps are also much different. Yechimovitch's bill calls for a fifty-fold gap, seemingly quite generous, and relates to gaps within the same firm. So managers can easily raise their own salaries if they are willing to be generous with their employees as well. On these criteria Yatom's bill is unreasonable. In the original version of the bill, later modified due to pressure of a ministerial committee, the proposal was to impose prison sentences on overpaid executives - a truly bizarre twist. If someone is paid too much, they can always return the money. This punitive attitude towards business people smacks of gratuitous resentment of business, especially since the salaries permitted are far from outrageous. This brings us to the second point: ten times the minimum wage in Israel is less than $10,000 a month - a salary which in America is in the reach of senior civil servants (a GS15 can make this much) or middle management in a few industries. It's not really reasonable to think this salary is able to attract the kind of managerial talent needed to effectively run a huge business like the Israel Electric Company with annual revenues of over NIS 17 billion or Israel Aerospace Industries with annual revenues of over NIS 10b. The bill suggests that managing a public-owned company is also a "public mission which can't be measured in money," but I can't see how that's a consideration in the many government owned-companies that are really just ordinary business enterprises that happened to be owned by the government. For instance, before researching this article I never even knew that the Tadmor Hotel School in Herzliya was state-owned. I don't favor Yechimovitch's bill. If the high private sector salaries are simply due to supply and demand, then government intervention in the functioning of the market can only hurt. (There is strong evidence for this position, in particularly the high salaries paid even to senior executives hired from outside companies, and thus lack authority within the company.) If they are due to some deficiency in corporate governance which makes it impossible for shareholders to exercise effective oversight over management - as Yechimovitch evidently believes - then this deficiency should be addressed directly, not through a salary cap. But at least the bill points to a plausible problem and provides some kind of flexible mechanism to deal with it. Yatom's bill by contrast seems off the wall. There's no excuse for paying the head of a multi-billion dollar business enterprise "according to salary criteria customary in the public service" (a quote from the bill). And the idea that running an aerospace company or a hotel school is a "public mission" is equally bizarre. Meanwhile, the original wording of the bill, imposing prison sentences on offenders, suggests a punitive animosity towards managers, rather than a constructive desire to reign in costs. The Israeli government owns these companies and is certainly within its rights to pay its managers whatever it wants. But if it wants to give the Israeli taxpayer the best return on their valuable assets, they will pay an amount sufficient to attract top-notch talent and in a way that affirms that their talent is appreciated. Yatom's bill would ensure perfunctory management and subpar returns on billions of dollars of public assets. [email protected] The author is research director at the Business Ethics Center for Jerusalem (www.besr.org), an independent institute in the Jerusalem College of Technology.