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Executive Salaries and the Financial Crisis

The initiative is in fact valid, in principle, from a capitalist point of view. One doesn’t necessarily have to have socialist tendencies—although there is nothing wrong with those who do—in order to support salary caps for executives, only rational and realistic ones.

According to Israeli corporate law, directorates and shareholders are responsible for overseeing executives and setting salary levels. But in truth, it is a well-known secret that the shareholders of public companies are indifferent; that directorates often function as rubber stamps; and that those who control the companies often collaborate with executives in order to promote their own personal agendas. A good example is the decision to regulate bank stocks, which was made over twenty years ago, but was never discussed at any of the board meetings of the five banks that were involved in the scandal that led to their nationalization. Despite some minor improvements, the situation has remained unchanged—shareholders and directorates are incapable of overseeing executives.

Lawsuits calling for limiting executives’ salaries are likewise unsuccessful. The right to press charges belongs either to indifferent shareholders or to the companies themselves, which usually refrain from pressing charges against their own executives. The will to press charges is further weakened by the extended nature of the procedures that often characterizes Israel’s judicial system, their high costs, the courts’ lack of expertise, and the potential defendants’ “deep pockets”. Oversight through the market’s own powers is also not viable because there is often a lack of any real competition. The decision to publicize executive salaries has had the opposite effect of what was initially intended and has led many executives to demand pay rises in order to match those of their counterparts in other companies. The inadequacy of corporate, legal and economic oversight justifies the call for legislative intervention.

It is widely accepted that executive salaries ultimately serve society’s greatest interest—increasing the value of stocks. Therefore, one might assume that there is nothing wrong with shareholders’ agreement to pay exorbitant salaries to the executives of “their own” companies. This too is inaccurate because companies are not the property of their shareholders, but rather ownerless legal entities. A company is a team of people working together—the employees’ hard work, the credit provided by creditors and the national infrastructure are all no less essential than the shareholders’ investments. Exorbitant executive salaries, even when endorsed by shareholders, may not be in the interests of the rest of the company and, thus, are counterproductive. Because the others have no say in deciding and overseeing executive salaries, legislation to protect them and to prevent discrimination against them in favor of executives must be passed.

As for the fear of a Brain Drain, it is groundless. For many years, American companies have been paying their executives far more than those in Europe or Asia. When Daimler-Benz merged with Chrysler, it became apparent that the American CEO earned ten times more than his German counterpart and more than the entire German Board of Directors put together. If Europeans and Asians are not emigrating, it is safe to assume that our own executives will likewise be content with less, especially at a time when voices calling for limiting executive salaries are being heard throughout the West. 


 Prof. Yedidia Z. Stern is Vice President of Research at the Israel Democracy Institute and Professor of Law at Bar-Ilan University.