By American standards, executive pay in Israel isn’t particularly extravagant. The top 10 earners in the financial industry receive nothing approaching what Jamie Dimon, CEO of JPMorgan Chase, gets in a year. But that hasn’t stopped Israel’s lawmakers from introducing some of the toughest CEO pay restrictions in the world.
Israel’s parliament passed a new law effectively limiting executive compensation to 44 times that of the lowest-paid workers in a company. Anything above that will be subject to higher tax rates.
The law will probably mean substantial cuts for Israel’s highest earners. Banking CEOs get up to 8.1 million shekels a year ($2.1 million) currently, and the new cap is likely to be around 2.5 million shekels (about $550,000).
In pushing through the new law, Finance Minister Moshe Kahlon pointed to the “ethical and moral failure” of big pay differences, and said the “ramifications are felt across the width and breadth of the Israeli economy.” The banking industry called the new law discriminatory, as it will apply only to the banks and insurance companies, not other industries.
A 44-times pay ratio is a good deal less than what we have here. Our ratio of average CEO to average worker pay is about 300 times, up from about 25 times in the 1970s. Switzerland has the next highest ratio, at 148 times, while Germany’s ratio is at 147.
The U.S. does have some limits in the tax deductibility of top incomes. Most compensation above $1 million needs to be “performance-based,” according to a 1993 law. But this rule is easily flouted and hasn’t done anything to restrain C-suites. Average CEO pay has been rising at double the rate of the stock market as a whole, suggesting CEOs are better at winning salary increases than driving profits.
Under new Securities and Exchange Commission rules approved last year, public companies now have to report CEO-to-median-pay ratios to investors. But it’s too early to say whether this in itself will have much impact. Reporting something isn’t the same as doing something about it.