In Israel, a Step toward a CEO Pay Cap

By Wall Street standards, top financial industry execs in Israel make virtually nothing. The top 10 of them last year pulled down a combined $14.9 million. Jamie Dimon, the CEO of Wall Street’s JPMorgan Chase, last year grabbed nearly double that — $27 million — all by himself.

Dimon could well make more next year. His Israeli counterparts now appear likely to make even less. The Knesset, Israel’s parliament, has just passed legislation that caps financial industry CEO pay at 35 times the gross income of that CEO’s lowest-paid employees. Banks that pay over that 35-times cap won’t be able deduct the excess off their taxes as a business expense.

Top financial industry execs in Israel currently make up to 140 times more than their workers. The new Knesset legislation essentially caps top pay for tax purposes at $510,000.

Serious public distress over corporate pay practices started surfacing in Israel about a decade ago. Between 2000 and 2006, worker productivity in Israel had increased nearly five times faster than worker paychecks. Those take-homes rose only 1.9 percent. Executive paychecks, meanwhile, jumped 35 percent in the last three years of that period alone.

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Such stark economic gaps, the then-Israeli defense minister Amir Peretz told a 2007 conference, could only breed “tensions, bitterness, and anger.”

“A society that does not have a reasonable and balanced distribution of wealth,” Peretz, a former trade union leader observed, “will be a society with unrest.”

That same year, two lawmakers in the Knesset introduced complementary versions of “maximum wage” legislation. One bill from the Labor Party’s Shelly Yachimovich called for denying corporations a tax deduction on any executive pay that ran over 50 times the compensation of a company’s lowest-paid workers.

A companion proposal from Labor Party lawmaker Dani Yatom would have set a hard cap on executive pay in all government-owned enterprises, at 10 times the Israeli minimum wage.

By 2010, Yachimovich’s basic proposal had built up support far beyond Labor Party ranks. The idea of linking executive pay to a multiple of worker pay had “fired the imagination of large sections of the population,” one Israeli pundit wrote, in a way legislative proposals “almost never do.”

That turn of events didn’t at all please Israeli prime minister Binyamin Netanyahu. On the eve of Knesset action, he ordered cabinet members from his Likud Party to postpone the vote on Yachimovich’s pay-cap legislation.

Netanyahu had the issue bounced instead to a special blue-ribbon task force packed with corporate-friendly dignitaries and academics. The task force dawdled and eventually produced a predictable set of toothless corporate governance reforms guaranteed to have no real impact on executive pay.

But advocates for pay caps kept plugging, winning more converts along the way as newly emerging global statistics continued to paint Israel as one of the world’s most unequal nations. Their work paid off this week. The latest version of the pay-cap legislation passed by a 56-0 margin.

This week’s Knesset action covers only banks and other financial industry firms. But the legislation’s supporters don’t plan on stopping with the financial sector.

“In the future,” notes Knesset finance committee chair Moshe Gafni, “we will consider limiting wages for all public companies, including non-financial companies.”

All this is alarming Israeli business respectables.

“Legislation of a maximum salary,” laments an editorial in one major Israeli newspaper, “exists in no other country with a free market.”

But that situation now appears ripe for change. India has just implemented regulations that require corporations to disclose the ratio between CEO and median worker pay. In the United States, a similar mandate will be going into effect next year, with the first public disclosures likely to hit the headlines early in 2018.

Those disclosures, by themselves, won’t narrow the ghastly gap between U.S. corporate executive and worker compensation. But Congress could impose consequences on those disclosures.

Lawmakers could, for instance, follow the Israeli lead and deny corporations tax deductions on any executive pay that tops median worker pay by a set multiple. Legislation to make that link has actually been pending in Congress since the early 1990s.

We’ve waited long enough.


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Posted In: Allied Approaches