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Executive pay skyrockets; performance does not

אוגוסט 4, 2010. Globes: Tzameret Pernat

Israel's executives have nothing to complain about. Their average salary rose 2.5-fold in the past seven years, and they don’t even have to break into a sweat, because the link between pay and performance is pathetic, according to a study by the Israel Securities Authority research department. The report was submitted yesterday to the Ne'eman committee which is examining executive salaries at public companies.

The study found a dramatic rise in executive salaries since 2003. In 2003, the average executive salary was NIS 1.6 million a year; it rose to NIS 3.9 million in 2009. The economic downturn in 2007 had almost on effect on executive salaries, which continued to climb.

The survey found that the average salary of a CEO rose from NIS 2.5 million in 2003 to NIS 5.3 million in 2007, but slid back to NIS 5 million in 2009. The same trend is seen in chairmen's salaries, which rose from an average of NIS 3.5 million in 2003 to NIS 5.5 million in 2007, and fell back to NIS 4.3 million in 2009.

Salaries of executives other than CEOs and chairmen did not fall over the period of the study. The average salary rose from NIS 1.2 million in 2003 to NIS 2 million in 2007 and to NIS 3.3 million in 2009. One hypothesis for the undistributed climb in these salaries is that, in contrast to CEOs and chairmen, these executives are not exposed to criticism, and their salaries are not usually disclosed.

Nonetheless, one of the study's prominent conclusions is the weak link between executive pay and performance; in other words, the salary of an executive who is failing at his or her job rises regardless of their record.

It can only be presumed that the decision last month by Africa-Israel Investments Ltd. (TASE:AFIL) to award NIS 7 million to certain executives, despite the company's condition, was no exception in the Israeli economy. Although the company claimed that the bonuses were awarded for the executives' efforts to rescue the company from its calamitous condition, the Securities Authority study found that their performance was not worthy for compensation.

The study also examined the role of companies' directors in the rise in executive salaries. It found that as far as executive compensation in public companies was concerned, the external directors functioned as watchdogs: the greater the number of external directors on a company's board, the lower the executive salaries at the company compared with their peers at companies with fewer external directors.

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