Entropy advises against Israel Chemicals' exec salaries

"It is difficult to assess the strength of the connection between performance and compensation," says Entropy, but Teva's policy gets the nod.

Two large Israeli companies - Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) and Israel Chemicals Ltd. (TASE: ICL) - have obtained opinions from US consultancy firms ISS Proxy Advisory Services and Glass Lewis, which support their executive compensation policies. "Globes" has obtained copies of opinions by Israeli firm Entropy Consultants Ltd., in which it advises Israeli investment institutions to oppose the executive compensation policy of Israel Chemicals, but to support the policy of Teva.

Amendment 20 of the Companies Law (the executive compensation amendment) states that a majority of the minority shareholders at a general shareholders meeting must approve the company's executive compensation policy. However, as "Globes" reported last week, even if the necessary majority is lacking, a company's board of directors has the right to approve the compensation policy, "provided that the compensation committee, followed by the board of directors" decided, on the basis of detailed arguments and after again discussing the compensation policy, that approval of the policy, notwithstanding opposition by the general shareholders committee, is for the good of the company."

This means that Israel Chemicals' board of directors can approve the salaries of the company's executives, even if the general meeting does not, if the board relies on the two favorable recommendations of the foreign consultancy firms that advise US financial institutions.

Israel Chemicals' executive compensation plan includes a basic annual salary (before bonuses and options) of $1.24 million for CEO Stefan Borgas, and $794,000 for other officers. Entropy opposes the plan.

Israel Chemicals bases its compensation policy on comparable foreign companies, without mentioning specific amounts. Entropy says, "It is difficult to assess the strength of the connection between the company's performance and the amount of the compensation… in view of the fact that the company does not mention the correlation between its performance compared with the foreign companies, including its standing in relation to them."

Entropy adds that the threshold conditions for bonuses at Israel Chemicals have limited effectiveness, and that the company's transparency is mediocre. "The quantitative targets for paying the bonuses are not disclosed… which weakens the shareholders' ability to assess whether the company has met the targets," it says.

Entropy also advises against Borgas's bonus and capital compensation items, and it advises the company to revise these items in accordance with its compensation policy. However, Entropy supports approving Borgas's grant for 2012, stating that it was approved before the compensation policy was adjusted in accordance with Amendment 20. The grant is $1.2 million for the four months that he served as CEO last year. It also says that a bonus of four salaries is reasonable, according to its methodology.

Last week, Israel Chemicals equipped itself with opinions from foreign consultancy firms, including Glass Lewis, which counter Entropy's opinion, and support the company's compensation policy. Glass Lewis believes that it is preferable that the decision on "companies' executive compensation be approved by the board of directors or compensation committee."

Teva

The summons for the general shareholders meeting that Teva published in July, which includes proposals for the compensation policy, states that president and CEO Dr. Jeremy Levin is eligible for a basic annual salary of $1.5 million, and an annual bonus based on the company's results. The bonus could reach $3 million, or even exceed this, at the company's discretion.

Teva says that Levin's bonus in 2012, amounting to 80% of basic annual salary, reflects the meeting of 94% of the targets set for him. As for his 2013 bonus, 85% of it will be based on the company's targets, and 15% on an assessment of his performance. If Levin surpasses Teva's targets, he could be eligible for a bonus of $3 million in 2013.

In addition to his salary, when Levin joined Teva he received options convertible to 450,000 shares at a strike price of $46, 15% above today's share price. He was also given 115,000 vested shares, which will be released in three equal installments from the second year after they were granted; a $1 million signing bonus; reimbursement for expenses for moving to Israel; and other benefits.

On Wednesday, Teva announced that it had obtained favorable recommendations from ISS and Glass Lewis. Both firms recommend voting for the company's proposals. Regarding Levin's salary, ISS says, the "proposed bonus policy appears to be reasonably structured." Glass Lewis says, “Overall, the company has provided adequate disclosure regarding its executive compensation program. We have not identified any significant issues for shareholder concern and believe that the company has designed appropriate incentive plans that will link pay for performance going forward.”

Given that Entropy also advises Israeli institutions to vote in favor, Teva's general shareholders meeting will probably approve its compensation policy on August 27.

In 2012, before Amendment 20 came into effect, Teva's shareholders meeting met to discuss raising the compensation of chairman Dr. Phillip Frost and other directors. Scores of investors were present, most of whom strongly opposed the pay hikes, and voted unanimously against it, some of the on the basis of Entropy's recommendation on the matter. But even before the meeting, Teva already had the necessary majority to approve the proposals, mostly from US investors who were not present at the meeting, but mailed their votes in advance.

The executive compensation policies of Israeli public companies are published pursuant to Amendment 20 of the Companies Law, which states that all public companies, including dual-listed companies and private companies with bonds traded on the Tel Aviv Stock Exchange (TASE), must obtain approval of these policies by a majority of minority shareholders at a general meeting by September 2013.

Some companies have obtained a deferral, but companies on the Tel Aviv 100 Index must obtain approval of compensation policies by the general shareholder meeting by September 12. Many meetings will be convened in the coming weeks to discuss compensation issues.

Published by Globes [online], Israel business news - www.globes-online.com - on August 15, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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