Professional enterprise consultants call it "reward for performance". It really means tying executive pay to how well the company does. In Israel, the truth is out there because publicly traded companies have to disclose the wage cost of their top five people. But professional enterprise consultants would be hard-pressed to explain how pay is governed at rather too many of Israel's publicly traded firms.
Take market capitalization. In a perfect world we'd expect a big company worth billions on the market to pay its owners and executives more money than a small company would.
But disclosures by Israel's firms show this rule of thumb to be void. Milomor, a real estate company traded at a market capitalization of NIS 120 million, paid chairman and CEO Freddy Robinson NIS 11 million last year (wage cost). By the way, that isn't all the Robinson clan gets from Milomor. Robinson's son works for a company subsidiary in Romania, which lost NIS 13 million in 2007.
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Milomor is rather an extreme case, but mineral-water distributor Mayanot Eden with its modest market cap of NIS 380 million paid CEO Raanan Zilberman NIS 15.5 million last year (all the figures in this article are in terms of wage cost). Holding company Polar Investments is worth NIS 350 million on the Tel Aviv Stock Exchange, yet its CEO Dubi Weiss cost NIS 11 million.
Moving on from market cap, profitability can be another tool to shape executive wages, but again that doesn't seem to apply to Tel Aviv. A company's sector of operations is key here, and there are companies (such as holding companies) in which quarterly profit is effectively meaningless. At least the top 10 most generous companies (to their executives) in Tel Aviv are profitable - no, nine are, Lagna Holdings is not. It lost money in 2007.
To elaborate the point, take Bank Hapoalim. The bank certainly made a profit last year - in fact a fat one of NIS 2.69 billion - but the point is that Hapoalim lost hundreds of millions of dollars on derivatives last year, and its profit was a far cry from that achieved the year before, and well short of Bank Leumi's NIS 3.3 billion for 2007. Its performance was therefore hardly the stuff of reward, yet the bank's top people were among the best paid on the list last year.
Yet another criterion may be earnings per share, which is what the owner really cares about. One could say that the CEO's real job (in a publicly traded company at least) is to manage the company - and manage earnings per share. But given the performance of many a blue-chip and smallcap alike last year, that hardly explains six-digit, let alone seven-digit, wage costs. Among the top 10, eight of the companies (that had been listed for trading throughout 2007) saw their share price shrink last year.
Actually, share-price performance leads us to the most glaring shortcoming in the list of executive earners, an item that renders the entire comparison problematic. Namely: stock options.
Stock options are shown in the lists according to their exercise price, irrespective of whether they are inside or out of the money. Which is another way of saying, irrespective of whether the manager in question will actually get his paws on it or not.
The best-paid executive in 2007, based on the companies' financial statements, was Mr. Eyal Lapidot. But more than NIS 30 million of the NIS 36 million that sent him to the top of the list were based on stock options that are far, far outside the money, and there's true doubt as to whether Lapidot will ever see an agora of that money.
Among the top 10 companies, controlling shareholders owned 78% of the firm's share capital, on average. And here we find the germ of an explanation.
Now let's look at the 10 bottom-most companies among the top 100 (remember, we're talking about executive pay, nothing else). What do we find? That the controlling shareholders own less of the company's equity, and the public owns more. The more "public" a company is, the more tightly executive pay is reined in.
Among the top 10, we find six controlling shareholders who fulfill a central role and take home extraordinary pay. The six are Nochi Dankner (IDB group), Chaim Katzman and Dori Segal (Gazit Globe), Eliezer Fishman (a bunch of companies including Jerusalem Economic Corporation), and Roni Biram and Gil Deutsch (Excellence Investments).
And let us not forget the role of politics, which can propel an ordinary manager to a sky-high salary.
The free market creates the background against which a true talent can rise in the ranks and finally take the helm, for appropriate pay. The kind of talent that can do a great job running a gigantic publicly traded company is rare, and scarcity costs.
Amos Shapira, who was recruited by Cellcom after terrific stints at El Al and other companies, is an example of this ilk. His wage cost was NIS 11 million last year, and evidently Cellcom had to go that high to lure him in.
Real estate magnate Lev Leviev has taken forever to find a new CEO to replace Erez Meltzer at Africa Israel, indicating just how rare a good CEO for a multinational can be. So when perusing the lists, keep in mind that supply and demand count too.
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