Bank CEOs’ pay: how big is a big salary?

2016-06-17 13:13

By Rabelani Dagada

When we were visiting Israel in February this year as participants in a study tour, my colleagues and I were privileged to interact with two prominent Israelis – Mr Stef Wertheimer and Mr Saul Singer. They both generously gave us copies of their books. Wertheimer’s book is entitled “The Habit of Labor: Lessons from a Life of Struggle and Success”, and Singer’s (and Dan Senor’s) book is entitled “Start-Up Nation: The Story of Israel’s Economic Miracle”. These two books hold many lessons for South Africa’s endeavours in crafting integrated industrial and economic development policies. Be that as it may, there is also much that Israel can learn from South Africa. Amongst others, this includes our governance guidelines on the remunmeration of executives.

A great deal has recently been said and written in Israel about the perceived exorbitant pay of Chief Executive Officers (CEOs) in the banking sector.  Most lawmakers, regulators and other commentators have argued that the huge gap between the salaries of junior employees and executives is exacerbating the inequality gap and this has the potential for negatively affecting the public’s trust in the banks.  It is on this premise that the Dr Hedva Ber, Supervisor of the Bank of Israel, and certain lawmakers in the Knesset (Parliament) are working towards enacting legislation which will limit the perceived extravagant salaries. Inasmuch as I am not an expert on Israel’s socio-economic dynamics, I am a free market advocate and am opposed to excessive market regulation.  As a matter of principle, therefore, I do not have a problem with bank CEOs being well paid.

Paying the bank executives in Israel lower salaries will not necessarily mitigate inequality, reduce bank charges and interest rates, or improve competition. However, lowering the salaries of executives may affect the performance of the banks negatively and this will lead to job losses.  My assertion lies with what the late Professor Larry Ribstein of the Illinois Law School once said: “Even the best regulations might err and enact regulation that is so strong that it stifles innovation and entrepreneurial activity. And once set in motion, regulation is almost impossible to eliminate” (King III, 2009). Israeli executives are highly sought after in developed markets and the country will lose those who are highly talented if there is indeed enactment of overreaching, ineffective and unnecessarily stringent salary regulations.

Israel lawmakers and regulators should start to view the banks’ CEOs as corporate entrepreneurs who should be rewarded fairly for value creation and the burden of responsibility they carry.  They contribute in the creation of thousands of jobs in the banking sector and thus it is highly unfair to criticise their remuneration. Although the CEOs are corporate entrepreneurs, they are making far less money than they would make if they were based in their own companies.  I have no doubt that if the highly experienced and qualified Ms Rakafet Russak-Aminoach and Mr David Brodet were running their own exclusive investment management companies they would have made far more money than what they were paid by the Bank Leumi.  CEOs in the corporate environment make money more slowly than their counterparts who are running their own enterprises. Yet no-one complains about how much entrepreneurs such Ms Shari Arison and Mr Warren Buffett, who are worth US billions of dollars, pay themselves.

It is my considered submission that CEOs worldwide, and in Israel in particular, are actually underpaid. Inasmuch as they create extensive employment, massive profits and significant taxes, they earn far less than people who are in sports and entertainment, for example.  Hollywood actor Tom Cruise and football players Cristiano Ronaldo and Lionel Messi are paid far more than some of the CEOs in the banking sector.

Having said this, I will concede that there are a few instances where the CEOs’ remuneration did not match their value creation.  It cannot be justifiable for the CEO to receive a huge bonus when the company is not growing or making profit. What is even worse, companies like Enron and WordCom that were on the verge of bankruptcy blatantly paid their executives extensive remuneration packages which can be considered not only unethical but also criminal.

I have always agitated for ordinary workers in agriculture, mining, manufacturing and other relevant sectors to be paid per units produced.  This principle should also be applicable to the CEOs; the better the company performs, the better the CEO’s pay.  My first advice is that Israel’s executives should take heed of what the South African based former CEO of Naspers (now Chairman), Koos Bekker was paid. Bekker’s biographer, Anton Harber, wrote: “He got no salary, no bonus, no car scheme, no pension fund, no medical aid, and no golden handshake”.  Naspers was also at liberty to expel Bekker on the spot without giving any reason or compensation. Bekker only received share options and this enabled him to intertwine his interests with the success and performance of the company. Interestingly, Bekker was fairly remunerated through the share options to the extent that when he vacated the CEO’s position and sold some of his share options, he received a payout of more than $1 billion. Did the shareholders complain? The answer is ‘no’, because in the process of creating value for them, he amassed extensive wealth for himself.  It is my recommendation that Israeli CEOs should adopt the Bekker model. This would enable them to operate like genuine corporate entrepreneurs.  Other than yielding fair compensation for them, it would go a long way towards eradicating the clamour about bank executive pay.

My second advice is that Israel’s executives should mitigate the stiff salary limits that may be imposed by lawmakers and regulators by embarking on self-regulation. This can be achieved by making necessary amendments to the Israel Corporate Governance Code (Goshen Report). Directors and executives in South Africa are pre-empting potential salary limit regulations by working towards the King IV Report on corporate governance which, amongst others, addresses executive pay. The King IV Report places the decision on the executive pay to the companies’ boards of directors. Just like King III, King IV will also operate on the ‘apply or explain’ basis. Companies listed on the Johannesburg Stock Exchange are perceived by foreign institutional investors as being among the best governed globally and thus corporate Israel can learn some lessons from corporate South Africa.

My final word of advice is that, as in South Africa, Israeli lawmakers and regulators should not regulate executive salaries. Of course, politicians and unions in South Africa have expressed their unhappiness regarding what they perceived to be excessive executive salaries, but it seems unlikely that there will be any amendments to the regulations anytime soon. If lawmakers, regulators and executives in Israel implement some of these recommendations, it will go a long way towards improving labour relations and public trust in the banking sector.

Dagada is a South African academic, analyst and consultant. He is on Twitter: @Rabelani_Dagada

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