1. Mutual back scratching
Today, executives at public companies are divided into two groups: those who are worried about Amendment 20 to the Companies Law and are feverishly seeking a way to get their salary terms approved (or at least to minimize the blow to their fat compensation packages); and those who are complacent in the knowledge that even though their generous salaries do not always reflect their performance, approval is assured. The latter include the executives at insurance companies and investment houses, financial institutions where 'you scratch my back, I'll scratch yours' prevails.
Most insurance companies and investment houses are public companies. Under Amendment 20, they must submit their executive compensation plans to their general shareholders meetings for approval by a majority of the minority shareholders. Who are the shareholders who will have to approve the executive salaries at the financial institutions? Other financial institutions, which hold the shares through the public's savings plans that they manage.
The alliance of the institutional brotherhood is straightforward, and is based on the principle of reciprocity: you ensure the approval of my inflated salaries, and I will ensure the approval of yours. I will protect you and you will protect me. Therefore, when an investment institution like The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) seeks the approval of the compensation of its CEO, Eyal Lapidot, which could reach NIS 12.5 million a year (including an extraordinary bonus, even if he fails to meet targets), another institution, such as Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), which also seeks approval of the compensation for its co-CEOs amounting to an aggregate NIS 16 million a year, will oblige.
Do not expect another institution, such as Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS) to raise its hand, or even an eyebrow, against such a compensation plan. After all, it remembers well how the institutional brotherhood approved the compensation package of up to NIS 4.3 million for an 85% position for its new chairman, Danny Naveh, despite his lack of managerial experience in insurance and financing, and his appointment by an associate, Nochi Danker, who controls the company, which is about to be sold.
In truth, can anyone expect the executives of the institutional brotherhood not to support Naveh's compensation package, however problematic it may be, in the knowledge that Clal Insurance will soon have to vote on their own compensation?
While the executive compensation plans at other public companies are subject to a flood of criticism (look at Israel Corporation (TASE: ILCO) for example), the salaries of executives of insurance companies and investment houses are easily and quickly approved. The high threshold of executive salaries in the financial industry is preserved, even though in some cases their compensation policy ihas nothing to do with performance and the threshold for receiving bonuses is set very low. In other words, the institutions are able to maintain the status quo that the regulator has sought to change, all in accordance with the new regulations, and financed in part by the public's savings.
2. Entropy's double standard
The firm that is supposed to protect the cream from the cats is Entropy Consultants Ltd., which provides recommends to financial institutions on how to vote in general shareholders meetings. Entropy, run by CEO Gal Staal, is a company that takes pride in its professional integrity as an "independent body."
Indeed, Entropy has lately won enthusiastic headlines in the financial press over its recommendations, which are perceived as courageous, to oppose the executive compensation policies at Israel Corp. and its subsidiary Israel Chemicals Ltd. (TASE: ICL). But what happens when Entropy has to offer an opinion about the executive compensation terms at financial institutions, which are also its main customers?
Ostensibly, it is unimaginable that Entropy would recommend approving the compensation of one of Israel's top-paid executives, Phoenix CEO Eyal Lapidot, even though he failed to meet targets, just because the insurance company is one of its customers. It is also unreasonable for Entropy to recommend approving the astounding salaries of Harel co-CEOs Shimon Alkabetz and Michel Siboni, who will earn NIS 7.4 million and NIS 8.4 million, respectively, just because they head an institution that regularly uses it services. After all, Entropy repeatedly stresses that it is "an independent body withstanding the pressures applied by companies for the purpose of approval of various decisions at general meetings."
But for whatever reasons, Entropy does recommend approving these compensation plans. And even if there is criticism in the market of the golden parachute that Clal Insurance sought for its new chairman Naveh, including three months' notice of dismissal and a paid adaption period of six more months, Entropy ruled that this was a reasonable condition. After all, this is the norm among the institutional brotherhood.
One might also wonder about the role of Israel Securities Authority chairman Prof. Shmuel Hauser on this issue. Why, two years after the Securities Authority declared that there was a problem with Entropy's monopoly in setting the norm for executive pay without fear or favor, has nothing changed?
Meanwhile, so long as things stay as they are, investment institutions will continue to be one big happy family. They have succeeded in preserving their inflated salaries, and if anyone complains, they can always wave their certificate of approval from Entropy, the "independent body" which sees no problem in giving recommendations on the compensation policies of its main customers.
Published by Globes [online], Israel business news - www.globes-online.com - on August 22, 2013
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